“My tax cut is the biggest since Ronald Reagan. I’ve very proud of it. It will create tremedeous (sic) numbers of new jobs” ~ Donald J. Trump (Well, he can’t spell)
Here is a summary of Donald Trump’s tax change proposals.
Tax Rates
There will only be three brackets rather than the existing six – 12%, 25%, and 33%. Corporate taxes will be fixed at 15% and there will be a 10% repatriation tax on foreign subsidiary accumulated earnings.
Deductions
There will be new deductions for health insurance premiums, childcare costs, and dependent care savings accounts. Itemized deductions will be limited to mortgage interest and charitable gifts. All deductions will be limited to a cap of $100,000 for individuals and $200,000 for those filing jointly.
Proposed Repeals
Trump has promised to repeal the Affordable Care Act (ACA), Alternative Minimum Tax (AMT), Gift & Estate tax, stepped up basis on gains over $100, and most business tax incentives. Kevin Thompson, CPA says “I cannot imagine the complexities surrounding the repeal of the ACA. Although I don’t like the idea that health insurance has become a tax issue, I also do not like the idea of uninsured Americans.” Thompson goes on to say “with these revised brackets and limitations on deductions, the complex AMT Regulations most likely become irrelevant.”
My office receives inquiries daily that ask “is there anything I should do to reduce my tax liability before President-Elect Trump’s inauguration.” Thompson says “that’s a tough question to provide some comprehensive answer that applies to all.” We are saying to all “It’s imperative that you plan for 2017 before the end of the year and before Trump takes office. He has made tax reform a priority in his first 100 days. Make sure to make an appointment with your tax consultant.”
Be cautious about deferring income.
This must be done with strategic planning. Even though tax rates are set to decrease, (according to Trump’s proposals) do not defer it immediately. Delaying your year-end bonus may result in a 7% decrease in taxes, for those in high-income brackets, but some taxpayers will see an increase in their tax. If you earn between $127,000 and $200,500, your tax will increase by 5% because the brackets will be changed from 28% to 33%.
What may affect you more is the elimination of popular tax deduction items. The only deductions available will be for mortgage interest and charitable contributions. You will not be able to write-off any of the other business expenses you did previously. Lower rates will only be guaranteed for those in high tax brackets. That means more of your income will be subject to taxes. This will result in higher effective rates even if marginal rates have decreased.
Accelerate your capital gains.
Although Trump hasn’t proposed changing the rate of capital gains taxes, the threshold for the 33% bracket will be much lower. Individuals will reach it with income of only $127,500 ($255,000 filing jointly) rather than the present $425,400 ($487,650 filing jointly)
Change your work classification
The 33% bracket will be in force for individuals with taxable incomes of $127,500 ($255,000 filing jointly) rather than at $425,400 ($487,650 filing jointly) Trump has also proposed that all business income be taxed at just 15%. You may want to consider freelancing rather than working as an employee. If you are an independent contractor, in compliance with IRS criteria, you can cut your tax by more than half for those paying 33% simply by swapping your W-2 to a form 1099. Thompson warns “this should not be done in a vacuum. There are a plethora of consequences including benefits and insurance that might be impacted by this decision. You should discuss at length with your counsel, both legal and tax, to ensure that you do not impact other issues relative to your career and employment.”
Make your charitable contributions before he takes office
Trump’s proposal for charitable deductions is limited to $100,000 for individuals. ($200,000 joint) If you exceed those amounts, it is recommended that you make your contributions this year before the cap is enforced. Thompson says “it is not clear from the proposals whether amounts exceeding the limits are carried over for future years. I don’t know to what extent this will impact charitable giving as tax consequences are not the only reason for charitable giving.”
No more depreciation.
Deducting the cost of business assets over a period of years will be a thing of the past. Trump wants any asset purchases to be deducted in full the same year as it was purchased. If you can’t deduct them all in 2016, you would be better off waiting until Jan 1. That way you’ll be able to write it off for next year. “this is a revolutionary approach to capital acquisitions” says Thompson. “Businesses will be able to finance some acquisitions with tax savings AND reduce their record keeping requirements.”
Don’t die until 2017 or later
Trump wants to get rid of the estate tax completely. If you die before Dec 31, 2016 your estate tax could be as high as 35%. Thompson says “Happy New Year. Your heirs are not looking for a reason to knock you off early.”
Contact Kevin Thompson CPA
kevin@kevinthompsoncpa.com or call him @ (310) 450-4625 x102