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Since Donald Trump won the presidential election in November, he has been busy putting together his Cabinet, as well as fine-tuning his domestic and foreign policies. One such domestic policy involves taxes. Generally speaking, Trump has repeatedly said that he is going to lower-income taxes and possibly eliminate various other types of taxes. Therefore, 2017 will be a very interesting year as it relates to taxes in the United States. Three potential tax New Year’s resolutions currently being promoted by Donald Trump are as follows:
1) Donald Trump has repeatedly stated that he will be reducing income taxes. It appears that his first step in following through on this promise is to reduce the amount of income tax brackets from 8 brackets with a top tax rate of 39.6% to 3 brackets. Those 3 brackets will be 12%, 25% and the highest bracket of 33%. If this tax reduction occurs in 2017, this could provide planning opportunities for individuals which they have not had previously.
One planning opportunity would be for individuals to strongly consider converting a traditional IRA to a Roth IRA. If you have a traditional IRA, then all distributions you receive from that traditional IRA are taxable. If you have a Roth IRA, all distributions from the Roth IRA are not taxable. Therefore with the lower income tax rates, it may be a good planning idea for an individual to convert his or her traditional IRA to a Roth IRA and pay the lower income taxes associated with that conversion. Each individual should work with their CPA and financial advisor to determine if this type of conversion is a good idea.
2) Donald Trump has stated that he will change the income tax standard deductions from $6,300.00 for single individuals and $12,600.00 for married couples filing jointly, to $15,000.00 for single individuals and $30,000.00 for married couples filing jointly. Also, itemized deductions could be limited. Currently, some amounts being discussed are a ceiling of $100,000.00 for single taxpayers and $200,000.00 for married taxpayers filing jointly.
If these changes happen, then individuals will need to review their current deductions because some of them may not be fully deductible any longer. For example, it may be better to pay off a mortgage than to have a mortgage and deduct the interest as an itemized deduction. Additionally, as it relates to charitable deductions, it may be better to establish a donor-advised fund, which allows an individual to bunch all of his or her charitable deductions into one year and potentially provide for income tax savings, instead of being able to deduct the charitable contributions when the charity actually receives the deduction. Again, this is a matter to discuss with your CPA and your financial advisor.
3) Donald Trump has stated on numerous occasions his desire to repeal the gift tax, and estate tax. Currently, each individual is allowed a $5,450,000.00 gift and estate tax exemption, and any amount over that exemption amount would be taxed at 40%. For 2017, the gift and estate tax exemption will be increasing to $5,490,000.00. Individuals with estates in excess of these exemption amounts will need to review their estate plan to determine how the repeal of the gift and estate tax laws would affect their estate plan.
For example, currently, when an individual passes away, the beneficiaries receive a step-up in basis on any assets that they receive. Thus, the step-up in basis allows the beneficiary to avoid income tax on a capital gain for an asset that is inherited. If the estate and gift tax laws are repealed, the question will be “Will an individual still enjoy the benefits of a stepped-up basis on the asset that the beneficiary inherits?”, or will additional planning need to occur to alleviate or reduce the capital gain that could be incurred by the beneficiary without having a step-up in basis on assets received? This is a situation that would need to be discussed with the individual’s advisors.
The calendar year 2016 was a very interesting year as it related to the presidential election. The calendar year 2017 will be even more interesting as it relates to various domestic and foreign policies established by Donald Trump. Please try to remain current on understanding these policies if, in fact, they do occur so that you can adjust your estate plan accordingly. Happy New Year!
NOTE: This general summary of the law should not be used to solve individual problems since slight changes in the fact situation may require a material variance in the applicable legal advice.
James F. Contini II, Esq. Certified Specialist in Estate Planning, Trust & Probate Law
by the OSBA Krugliak, Wilkins, Griffiths & Dougherty Co., LPA
158 North Broadway
New Philadelphia, Ohio 44663
Phone: 330-364-3472
Fax: 330-602-3187
Email: jcontini@www.kwgd.com