November 10, 2016
Tax reform just might happen…what can individuals
do now?
By Daniel N. Jones, CPA and Sarah M. Richards, Esq.
With a Trump presidency on the way and Republican control of both the House and Senate, the
prospects for tax reform just improved a bit. Make no mistake, comprehensive tax reform won’t be
easy to push through even with the support of the new administration and Republicans in
Congress. It’s been 30 years since President Reagan signed the last major piece of tax reform
legislation, a testament to the difficulty of doing so. It will take a big commitment from the players
at the table, so watch carefully in the first half of 2017 to see what traction it gets.
What might tax reform look like? The incoming President and the House Republicans have both
shared plans for income and estate tax reform. It’s worth examining both plans to search for
commonalities, as they offer some guidance on what a final compromise might look like for
individual taxpayers and their estates.
Trump income and estate tax plan highlights
− Reduce the number of individual income tax brackets from seven to three (12%, 25% and 33%)
− Retain the existing rates on capital gains (0%, 15% and 20%) and align them to the new proposed
income tax brackets
− Repeal the net investment income tax (3.8% tax on investment income)
− Increase the standard deduction from $12,600 to $30,000 for married couples filing jointly and
from $6,300 to $15,000 for singles
− Eliminate personal exemptions and the head of household filing status
− Cap itemized deductions at $200,000 for married couples filing jointly and $100,000 for singles
− Repeal the alternative minimum tax
− Repeal the estate tax, “but capital gains held until death and valued over $10 million will be
subject to tax to exempt small businesses and family farms.” [sic]
This newsletter is intended as an information source for the clients and friends of Nixon Peabody LLP. The content should not be construed
as legal advice, and readers should not act upon information in the publication without professional counsel. This material may be considered
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House Republican blueprint highlights
− Reduce the number of income tax brackets from seven to three (12%, 25% and 33%)
− Provide for 50% exclusion of capital gains, dividends and interest income. This equates to taxing
these items at half the rate of ordinary income (6%, 12.5% or 16.5%)
− Increase the standard deduction to $12,000 for singles or $24,000 for married couples filing
jointly
− Eliminate personal exemptions
− Eliminate all itemized deductions except for mortgage interest and charitable contributions
− Repeal the alternative minimum tax
− Repeal the estate tax and keep the step-up in tax cost
What planning opportunities might exist if tax reform occurs? Despite the difficulty of
Republicans agreeing on a uniform proposal and overcoming challenges from Democrats, these
two plans offer preliminary insight into any potential deal. If the major components of the two
plans listed above are implemented, individual taxpayers may want to consider whether some of
the following techniques are appropriate or possible:
Income taxes:
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Accelerate deductions that may be eliminated or capped. Furthermore, deductions are more
valuable when they offset income taxed at higher current rates.
Defer income where possible. For wage earners, this can be difficult; consider tax-deferred
savings vehicles such as IRAs, 401(k) plans or deferred compensation plans, and consider
delaying the exercise of employer stock options.
Delay realization of capital gains. On the other hand, consider accelerating realization of capital
losses to offset gains that may be taxed at higher current rates.
Reconsider asset location planning strategies. In the House Republican blueprint, interest is
taxed at the same preferential rate as capital gains and dividends. This may create more
flexibility in where to hold certain asset classes in your portfolio.
Estate & other transfer taxes:
− Defer making taxable gifts. A gift that would generate gift or generation-skipping transfer tax
under current law may not result in tax if transfer tax reform or repeal is enacted.
− If you anticipate that your estate is subject to federal estate tax (broadly speaking, if the value of
your assets is greater than the federal estate tax threshold [$5.45M in 2016; $5.49M in 2017],
subject to prior taxable gifts and various deductions), postpone the event that triggers it—your
death.
− If the step-up in tax basis upon death is eliminated (for some or all estates), consider whether
holding onto highly appreciated securities until death is still appropriate (e.g., utilize
intergenerational gifting if the next generation has capital losses available or is taxed at a lower
income tax rate). In this case, the income tax implications may drive the estate planning
decision.
Tax reform may still be a long shot, but the recent election results suggest that taxpayers should be
ready for anything.
For more information on the content of this alert, please contact your Nixon Peabody attorney or:
— Daniel N. Jones, CPA, 585-263-1101, [email protected]
— Sarah M. Richards, Esq, 617-345-6082, [email protected]