Evaluating the Effects of Possible Tax Legislation on Individuals
Author: Damien Martin
The political climate in Washington, D.C., along with recent remarks from congressional leaders and White House officials, seem to indicate the environment is ripe for tax change in 2017 and beyond. Even so, there are differing opinions about these major issues:
- When legislative language would be drafted and introduced
- How the legislation will read
- If there will be efforts to garner bipartisan support
- If the reform legislation would be retroactive to the beginning of 2017
Resolving the many differences within the current political agenda may make tax reform difficult to accomplish.
Though there have been many tax reform proposals, those put forth by House Republicans and President Trump are most likely to heavily influence tax change with Republicans in control of both Congress and the White House. If we see tax reform, the House Committee on Ways and Means Better Way for Tax Reform Blueprint (House Blueprint) is a likely starting point. Further, recent statements from House Speaker Paul Ryan and House Committee on Ways and Means Chairman Kevin Brady indicate these efforts may already be underway. Although the two proposals provide insight into how tax reform may look, they aren’t yet fully developed—and legislative language will be necessary to understand how the concepts would operate. Read “Election Results May Lead to Tax Changes in the New Year” to learn more about these proposals and how they compare to current tax law.
Despite the facilitative political environment, it’s difficult to predict the possibility or substance of tax reform without detailed proposals given plenty of differing opinions. Even so, possible tax reform can affect you, and understanding potential outcomes is important for your tax planning strategy.
To help you navigate uncertainty surrounding tax reform, here are some key areas and planning considerations that BKD’s Private Client Services tax professionals will be watching for in possible tax reform legislation.
Individual Income Tax
- The Trump and House Blueprint reform proposals both call for a reduction of the current top individual rate on ordinary income of 43.4 percent—including the 3.8 percent net investment tax—to 33 percent. They also suggest slimming the seven existing tax brackets down to three. Despite featuring overall lower ordinary rates, both plans could cause some taxpayers to pay a higher rate on this income due to the condensed brackets. The proposal to reduce capital gains rates also could result in higher rates. Read “Planning for Tax Change & Lower Rates Under the Current Tax Proposals” to learn more and compare the proposed individual tax brackets to the 2017 brackets under current law.
- The House Blueprint calls for a 25 percent tax rate on income from pass-through entities, e.g., partnerships and S corporations, while Trump’s proposal suggests a 15 percent rate on profits retained within the pass-through entity. For many taxpayers, these rates would represent a decrease from the current individual ordinary tax rates on pass-through income. More details are needed to understand the effect of this proposed rate reduction on individual taxpayers who own interests in pass-through entities. BKD will closely watch for these details to identify possible planning opportunities; however, it’s too early to take action related to the proposals at this time.
- Those who expect a lower tax rate environment in 2017 or beyond should focus on deferring income, accelerating deductions and recognizing losses where possible. This planning may present an opportunity for permanent tax savings with potentially lower tax rates on the horizon.
Estate & Gift Tax
- President Trump campaigned on repealing the “death tax” by replacing it with a capital gains tax at death on estates of a certain size and has hinted at repealing the gift tax. Technical language and details are necessary to interpret how the taxes would operate. The House Blueprint calls for repealing both the estate and generation-skipping transfer (GST) taxes but doesn’t mention a gift tax repeal.
- Estate tax repeal appears to be a lower priority than business and individual tax reform based on statements from congressional leaders and the White House. A repeal would require additional political stamina if it follows business and individual tax reform, which may make this effort more difficult to accomplish.
- If the estate tax is repealed, it’s anticipated a GST tax repeal will be paired with some form of carryover basis regime. The gift tax likely would be retained as a backstop to the income tax to discourage the transfer of assets to taxpayers in lower tax brackets with lower income tax rates.
- Congressional Republicans may be motivated to deliver on promises to repeal the estate tax. With Republicans lacking the 60-vote supermajority in the Senate to overcome a filibuster resulting in repeal legislation stalling out, they may proceed without bipartisan support using budget reconciliation procedures. These procedures generally prevent a filibuster; however, 60 votes are still necessary to approve provisions that lose revenue beyond the 10-year budget window. Thus, repeal legislation passed through budget reconciliation likely would only be temporary, i.e., sunset before the end of the budget window, and estate and gift planning will remain important during the repeal.
- It may be advisable wait on estate and gift planning until the outlook on a possible estate tax repeal comes into better focus. At the same time, there are risks associated with postponing estate planning decisions in some cases. Consult with your BKD advisor to evaluate planning options specific to your situation.
While it’s still too early to predict the timing and substance of possible tax reform, reviewing your tax plan with your BKD advisor on an ongoing and regular basis will help prepare you for potential tax changes.