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Tax Reform On The Horizon?

With the election now behind us there has been much discussion about what potential tax changes could be passed next year when President Trump takes office. As we all learned from the election, predicting the future is incredibly difficult and nobody knows with any certainty what will eventually be passed. However we do have proposals from both Trump and the House of Representatives and they are very similar. They both represent a drastic change from our current tax law and with the Republicans now in control of both the House and the Senate, it's quite possible some tax reform could be pushed through in 2017 or 2018.
Here are some of the key points of the proposed tax plans:
Individual Income Tax
  • The general theme of potential tax reform would be similar to that of the 1986 Tax Reform Act in that it would seek to broaden the tax base, reduce rates and simplify the code.
    • Lower Rates - The current top tax bracket is 39.6%. This would be lowered to just 33% under the Trump and House plans.
    • Fewer Brackets - There are currently 7 tax rate brackets. The proposals both have 3 brackets at 12%, 25% and 35%.
    • Standard Deduction - This would be increased so fewer people will itemize their deductions.
  • In order to help offset the reduction in tax rates, personal exemptions would be eliminated and itemized deductions would be capped.
  • Changes to the Affordable Care Act could mean the end of the net investment income surtax of 3.8%
  • The Alternative Minimum Tax (AMT) is also in the cross hairs and could be eliminated
  • Mr. Trump's plans for capital gains rates are in line with the current law but the house proposal drops the rates from the current 0%/15%/20% to 6%/12.5%/16.5%
Estate Tax
  • Under current law the Federal estate tax exemption is set at $5.45 million ($10.9 million for a married couple) and the top tax rate is 40%. You are also allowed a "step-up" in basis on any assets to their current fair market value on the day that you die. This allows heirs to avoid paying capital gains tax on assets that have appreciated in value.
  • Mr. Trump's plan is to fully repeal the estate tax but to also eliminate the step-up in basis. That would mean any assets passed down to heirs would do so tax-free but could trigger big capital gains taxes.
  • The House plan is to both repeal the estate tax and to keep the step-up in basis. 
Regardless of what actually ends up happening, you should be cognizant of these potential changes as you consider your year-end tax planning. There's a good chance your tax rate will be lower sometime in the near future than it is this year, which means typical year-end tax planning strategies to defer income and accelerate deductions could be particularly valuable this year. It also means some income tax planning strategies that have been done in the past that relied on future tax rates at a certain level (like Roth conversions) will need to be reevaluated. Estate planning strategies should likely be put on hold until we have further clarification on what might happen next. 
If you want to discuss your own tax situation and what you should be thinking about before the end of the year, call us now to set up a meeting.
The views expressed represent the opinions of L.K. Benson & Company and are subject to change.  These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person.

Please see Additional Disclosures more information.