The vote is in and Donald Trump will take office with republicans controlling the Senate and House of Representatives. You may recall the last time the Presidency and Congress was controlled by the same party was eight years ago, when the Affordable Care Act (Obamacare) was passed. Regardless of the debate on the merits of the law, most would agree that the ensuing eight years have exposed some significant issues with the Act, many of which are still being addressed through the courts and Internal Revenue Service (believe it or not, some very complex pieces of the law haven’t even been implemented yet).

Now we expect a similarly expansive and controversial set of reforms to be proposed by the House in 2017. While several components of the reforms are yet to be disclosed, there are a few details that have been publicized by some party headliners:

1. Corporate tax rates could go down to 20% (from rates as high as 39% currently)
2. Income tax rates could drop slightly for most married taxpayers earning $150,000 or less (or $90,000 if single), while those earning over $400,000 annually would see the greatest benefit (a reduction from 39.6% to 33%)
3. Estate and gift taxes could be repealed entirely, though provisions allowing for a step-up in basis would also disappear
4. The Alternative Minimum Tax scheme would be repealed entirely
5. Itemized deductions, aside from mortgage interest and charitable contributions, could be on the chopping block for individual taxpayers. Additionally, charitable contribution deductions could be limited to $100,000 for individuals or $200,000 for married taxpayers
6. The Affordable Care Act will likely be heavily modified, though House leaders have not provided a framework for how any changes will be borne out

While tax reform is a key issue for many republicans, it is not the top issue; immigration, health care, and a Supreme Court nomination are likely to be dealt with before tax reforms are taken up. It’s likely that tax bills will not be voted on until the end of 2017, so the impact may not even be seen until the 2018 tax year. So what are you to do now that we’re quickly approaching the end of the tax year?

First, even though we don’t have any specific definitive changes, the mood of the executive and legislative branches of government is clearly moving towards reducing taxes. Chances are that a personal deduction (charitable contributions or retirement plan contributions come to mind) or business expense (buying new equipment for example) in 2016 will yield a larger benefit than in 2017 (or 2018). If you are planning a substantial charitable contribution (over the limits noted in item 5 above), consider making that contribution by the end of this year. Future deductions may be limited.

Second, because repeal of the estate tax is not a certainty (nor is the timing known), continue to do common year-end tax planning, such as making annual exclusion transfers (through Crummey trusts or by contributions to Section 529 plans) and paying tuition and medical care costs (both of which are gift tax free). Additionally, while restrictions proposed on Grantor Retained Annuity Trusts (GRATs) under President Obama will likely be eliminated with the new administration, the elimination of the gift and estate tax schemes, along with the elimination of the step-up in basis provisions, could make some current forms of advanced planning irrelevant (for example, popular Zeroed-Out Grantor Retained Annuity Trusts may be subject to much less restriction, but the usefulness of the trust could become all but nonexistent with the phase out of the gift and estate taxes). Once tax reforms are passed it will be critical to review your estate plan with your accountant and legal counsel.

Lastly, give us a call before making any significant purchases or business decisions. No one knows what the future is going to bring for our tax system, but we can offer advice on potential benefits and pitfalls based on how tax reform proposals are progressing and our knowledge of your tax situation.

Matt

 

 

 

 

 

 

 

 

Matt Gonda, CPA
MattG@Godeckeclark.com
760-346-3861