(W&M Law Student and Spring 2017 Extern)
The results of the 2016 Presidential election were surprising to some and a relief to others. Towards the end of the election season, the spotlight was focused on Clinton’s campaign and less attention appeared to be given to Trump’s tax policy position. In order to help our clients better understand our 45th President’s tax policy proposal and its potential impact on your estate plan, we offer this brief summary. The President’s proposal is still just that, a proposal. We should expect some shifting and maneuvering of the proposal as it evolves through legislative negation.
- Income Tax
Income tax rate
Long Term Cap Gains/Dividends Rate
$0 to $37,500
$0 to $75,000
$37,501 to $112,500
$75,001 to $225,000
$112,501 and up
$225,001 and up
Under Donald Trump’s current plan, the seven income tax brackets are reduced to three. The capital gains rate and schedule will remain the same and be applied to the three brackets with a maximum of 20%. JGB is watching this capital gain proposal intently as we believe that this is a point in his plan that could be subject to later revision.
- Gift and Estate Tax
Donald Trump would like to repeal the gift tax and estate tax. With the repeal of the estate tax, the step up of cost basis would also be eliminated. Upon receipt of inheritance, beneficiaries would instead pay capital gains on the differences between the recognized sales proceeds and the original cost basis. This could cost a great many Americans a huge amount of money. This is one of the primary reasons that we believe that his capital gains position identified in Item I above could be subject to change. It would be much easier to balance the federal budget, after eliminating the so-called “death tax” (that currently does not impact the majority of Americans) by increasing the capital gains tax rate once the step up on cost basis has been eliminated at death. If this does occur, all JGB clients will need to consider the impact that this may have on their estate plans. We may see an environment where the use of life insurance policies once again become a major strategic tool in planning for estate distributions, not for estate tax avoidance, but for conversion of capital assets to an income tax free distribution vehicle upon death.
- Mortgage Interest Rate Deduction
Currently, there is no proposed change promulgated to eliminate the mortgage interest rate deduction. However, this has been a discussion point of the policymakers in the past. Standard deductions for individuals will increase to $15,000 for individual filers and $30,000 for joint filers, so most individuals will no longer file for mortgage interest rate deduction.
- Charitable Gifts
President Trump’s plan curtails the benefits of itemizing deductions as it would significantly increase the standard deduction for taxpayers who do not itemize. Although the proposal would preserve the deductions for charitable gifts, it would cap total itemized deductions, including charitable contributions, at $100,000 for single filers and $200,000 for married couples filing jointly. This type of cap would have minimal impact for donors who make modest annual charitable gifts. However, donors who wish to make large, transformational gifts could be limited in their ability to benefit from the income tax charitable deduction.
IIV. House Proposal
There is also a House tax proposal called “A Better Way,” led by Speaker Paul Ryan covering some of the same tax issues and concerns as Trump’s plan. The champions of both tax proposals will have to reconcile their differences during legislative negotiations. However, the many similarities between the two plans indicates that the final tax bill is likely to include some form of these various new provisions. Some of the tax law changes could reduce the tax benefits of making charitable gifts. Both plans propose a lower top income tax rate. The mortgage interest and charitable deductions will hopefully be preserved, but they may become subject to some other adjustment like dollar caps.
It is important to remember that these proposals are not yet law. JGB will continue to monitor the upcoming legislation closely. If you have questions or concerns about your estate plan, please schedule a document review appointment with your JGB attorney.