Presidential candidates Donald Trump and Hillary Clinton presented their tax plans in the first quarter of this year, but both candidates modified their proposals in September. McManus & Associates Founding Principal and AV-rated Attorney John O. McManus offered his thoughts on the impact that each proposal would have on tax planning and wealth management. To hear discussion on the salient points from each of the candidates’ tax plans, click below:
Trump vs. Clinton: Proposed Tax Plans
1. Tax Platform
A. Trump’s Plan
i. Reduce taxes, especially for working and middle-income Americans
ii. Ensure the wealthy pay their fair share, while making sure that such share does not destroy jobs or undermine their ability to compete
iii. Eliminate special interest loopholes, but also make the U.S. business tax rates more competitive, thereby keeping more jobs in the U.S.
B. Clinton’s Plan
i. Ensure that the effective tax rates rise for taxpayers who are avoiding paying their fair share and that the richest Americans pay an effective tax rate higher than middle-class families
ii. Close the loopholes in the tax system that allow the wealthy to avoid paying their fair share of taxes
iii. Support the Buffet Rule, which would ensure that those making more than $1 million per year would pay a minimum tax rate of at least 30%, so that they do not pay a tax rate lower than that paid by the middle class
2. Estate Taxes
A. Trump’s Plan
i. Eliminate the federal estate tax that is levied on estates of $5.45 million for a single person and $10.9 million for a married couple
ii. However, do not allow a step up in basis if capital gains on assets at death exceed $10 million. (Currently, with the step up in basis, the appreciation on the assets that pass to the decedent’s heirs is not taxed.)
iii. A further caveat, disallow donations of appreciated assets to a private charity created by the decedent of his or her relative
B. Clinton’s Plan
i. Reduce the federal tax exemption to $3.5 million single and $7 million for a married couple
ii. In lieu of the present maximum rate of 40%, raise the rate on smaller estates to 45%, and then add three additional tax brackets for larger estates:
Estates greater than $10 million 50%
Estates valued at $50 million or more 55%
Estates valued at $500 million or more 65%
Note: Americans saw rates this high back in the early 1980’s
iii. Eliminate the step up in basis on assets owned by the decedent at death (there would be an exemption of an undetermined size that would focus the tax on high-income families; Clinton’s campaign indicated it would include protections and flexibility for small and closely held businesses, farms and homes, and personal property and family heirlooms) No details available yet.
3. Income Taxes
A. Trump’s Plan
i. Simplify the tax code by decreasing the current seven tax brackets to three brackets: 12%, 25%, and 33% (currently 39.6%). The 33% bracket would apply to married couples with taxable income of more than $225,000 and to a single person with taxable income of more than $112,500
ii. Continue the existing capital gains rate structure, with 10% capital gains tax for those in the 25% bracket and 20% gains tax for the 33% bracket
iii. Repeal the alternative minimum tax and eliminate the 3.8% tax on investment income
iv. Eliminate the favorable filing status and tax rates for head of household
v. Instead of a child tax credit, child tax costs would be a tax deduction, subject to income caps.
B. Clinton’s Plan
i. Support the current seven tax brackets, and also add a 4% surtax on income above $5 million, thereby increasing the top bracket to 43.6%
ii. For capital gains, create higher capital gains rates on a sliding scale, such as 36% if assets held 2-3 years, and then the rate would decline 4% per year until it reaches 20% if held more than 6 years. Gains on assets held less than two years would be taxed at ordinary income tax rates.
iii. Require taxpayers earning more than $1 million to pay a minimum tax rate of 30% (the Buffet rule)
iv. New proposal would double the child tax credit to $2,000 per child less than 17 year of age. Currently, the $1,000 credit per child is phased out if a couple’s income exceeds $110,000.
4. Business Taxes
A. Trump’s Plan
i. Support a 15% corporate rate rather than the current 35%, with the rate available to both small and large businesses
ii. Allow manufacturing companies in the U.S. to elect to expense all capital expenditures (if election made, company could not deduct the interest on the financed purchases)
B. Clinton’s Plan
i. Do not change the corporate tax rates
ii. Allow small businesses to expense up to $1 million of new asset purchases
5. Carried Interest Loophole: Managers of private equity and hedge funds can characterize their investment profits as carried interest which is taxed at capital gains tax rates
A. Trump’s Plan: Would tax carried interest as ordinary income
B. Clinton’s Plan: Would tax carried interest as ordinary income
6. Corporate Inversions: U.S. company acquires a company based in a foreign country (usually a low-tax country) and then relocates overseas to the other country for tax purposes to avoid paying U.S. corporate taxes
A. Trump’s Plan
i. Corporate inversions less attractive, due to Trump plan’s large decrease in the corporate tax rate, from 35% down to 15%
ii. Allow previously untaxed foreign corporate profits held abroad to be repatriated at a one-time tax rate of 10%
B. Clinton’s Plan
i. Impose a 50% threshold for foreign company shareholder ownership after a merger before an American company can give up its U.S. identity, which would make it harder for a U.S. company to be classified as foreign-owned to avoid taxation by the U.S.
ii. Push for an “exit tax” on companies that leave the U.S. so they pay a fair share of the U.S. taxes they owe on deferred foreign earnings.
7. Tax Policy Takeaways – Impact on Estate Planning and Wealth Management
A. Trump’s Plan:
i. Planning should proceed as usual but should be structured around multiple goals and not just minimizing taxes, especially if his elimination of the estate and gift taxes is implemented
ii. Clients should be aware that the tax benefits of their original estate plan might not occur, although their other goals may be realized
iii. Irrevocable life insurance trusts (ILITs) will continue to provide benefits including asset protection and divorce protection
B. Clinton’s Plan:
i. Like 2012, there will be a scramble to get the necessary planning in place to utilize the current estate and gift exemptions before her proposed tax plan is implemented
ii. There could be restrictions on the use of GRATS – therefore, estate plans should incorporate long-term GRATs to take advantage of the current low interest rate environment
iii. Decanting powers should be included in trust documents for the flexibility to anticipate future planning and changes
iv. With the loss of the step up of basis at death, grantors should be given the flexibility for swapping assets into and out of their trusts
We also wanted to bring to your attention the recent NJ legislation that repeals the NJ Estate Tax. Presently, the NJ Estate Tax is imposed on estates exceeding the current exemption of $675,000. As a result of this legislation, the exemption will increase to $2.0 million per person as of January 1, 2017 and the estate tax is entirely eliminated effective January 1, 2018. The legislation does not repeal the NJ Inheritance Tax, which is a separate tax imposed on inheritances received by non-lineal heirs (a beneficiary who is not a spouse, child or descendant). Inheritances received by siblings and nieces/nephews, for example, are subject to the Inheritance Tax.
Also, for those clients receiving pensions, the legislation increases the NJ gross income tax exclusion for pensioners and retirees (over a four-year period) to $100,000 for joint filers ($20,000 currently for 2016, then $40,000 for 2017, $80,000 for 2018 and then $100,000 for 2019), and $75,000 for individuals ($15,000 for 2016, then $30,000, $60,000 and $75,000 respectively.
For guidance on how to best modify your estate planning strategy in light of this year’s election and forthcoming changes to New Jersey’s laws, call McManus & Associates at 908-898-0100.
⟩
⟩
⟩
⟩
⟩
⟩