CWA Managing Partner Dan Wicker Shares the Firm’s Analysis of the Effect the President-elect’s Proposed Tax Changes May Have on Individuals and Business.
After the historic election victory of Donald Trump, there are numerous questions about how the Trump plan may affect individuals and businesses. On the surface, his proposal aims to simplify tax rates, lower tax rates for corporations, and cap some deductions. And with Congress being controlled by the Republican Party, 2017 could mean significant tax reform that would benefit many CWA clients for the next several years. CWA took a close look at the proposed plan, here’s our analysis of what we know so far:
Individual Income Taxes
1. The current seven tax brackets will collapse into three brackets with 33% being the highest individual.
2. The current capital gains brackets will remain the same except there will be a maximum rate of 20%.
3. The 3.8% Affordable Care Act (ACA) tax on investment income will be repealed. Many CWA clients are currently seeing this tax levied on interest, dividends, capital gains and rental income.
4. The alternative minimum tax (AMT) would be repealed.
5. Itemized deductions (mortgage interest, property taxes, state, local taxes, and charitable contributions) will be capped at $100,000 for single filers and $200,000 for married filers.
CWA Analysis: The proposal would certainly lower taxes on CWA clients with taxable income above $413,350, based on the 2016 rates that currently fall into the 35% and 39.6% bracket. Clients with taxable income that is less than $413,350 will see little change in personal income tax because currently, at this income level, they would fall within the 33% tax bracket.
Elimination of the 3.8% ACA tax on investment income would certainly help many CWA clients. There would no longer be the additional 3.8% tax on interest, dividends and capital gains, or on net rental income from third-parties. CWA clients with substantial personal investments or rental income would benefit most from this reduction.
The elimination of AMT would be a potentially large benefit for clients that have high state income taxes and property taxes. These are the two largest adjustments in calculating the AMT. You can estimate the savings you may have on the elimination of AMT by looking on page 2, line 45, of your personal income tax return. AMT has increasingly affected more CWA clients over the last few years.
Corporate Income Taxes
The corporate income tax rate would be lowered from 35% to 15%, and apply for most businesses including partnerships and S-Corporations. The tax rate would apply only to profits retained within the business.
CWA Analysis: In most cases, clients do not want to leave profits in their business since they would still pay tax at their top ordinary rate. Under the proposed plan, all profits retained in the business would be taxed 15% with no additional personal income tax. This could be a win for small businesses wanting to retain more cash for future business cost or expansion.
The plan proposes the elimination of the federal and estate gift taxes. Under the current 2016 system, gross estates over $5,450,000 for each decedent are subject to federal estate taxes.
The proposed Trump tax plan is just … proposed. At CWA, we will continue to watch developments to take advantage of any planning opportunities that may become available in 2017 with the passing of tax reform.
In the meantime, here are a few possible savings opportunities to explore as we head toward year-end 2016.
· There’s a general consensus that personal income taxes will be lower in 2017. You should consider pushing as many deductions as possible into 2016 if your taxable income puts you in the 35% or 39.6% tax bracket. This would include the prepayment of expenses such as rent, supplies and purchase of any equipment.
· CWA clients with cash balance plans can look into maximizing any contributions to their plans, which may include underfunded plans. Contributions can be funded until September 15, 2017, and still be included as a deduction in 2016.
· Explore the potential for deferring income into 2017. For example, a large case for a patient could be scheduled and pushed into 2017.
· Make sure that all real estate and personal property taxes are paid prior to December 31, 2016. Additionally, if you are not in AMT make sure all state income taxes are paid prior to December 31, 2016.
CWA clients can be assured we are evaluating all of these potentially money-saving tactics for each of you. Your planning team will coordinate with you as your taxes are reviewed prior to year-end. Again, we will be following this very closely in 2017 and will keep you informed of any changes that are made into law.
Source: Donaldjtrump.com/policies/tax-plan, as of Nov. 29, 2016.
Cain, Watters and Associates LLC is an Investment Advisor registered with the Securities and Exchange Commission. Information provided does not take into account individual financial circumstances and should not be considered investment or tax advice. Request Form ADV Part 2A for a complete description Cain Watters financial planning and investment advisory services. Before implementing any components of a tax strategy consult your tax advisor.