The election of Donald Trump as the next president of the United States, coupled with the Republican Party maintaining its control over both houses of Congress, portends the possibility of significant changes to the tax law. While it is too early to predict what will happen, significant changes in the income, estate, gift and generation-skipping transfer tax laws are now more likely than at any time in recent history. Some limited information is available based on the president-elect’s website, but some of the proposed changes presented on the website are described below.
Federal Estate, Gift and Generation-Skipping Transfer Taxes
The federal estate tax would be repealed. In another change from current law, a capital gains tax would be imposed at death on assets over $10 million, with an exemption for small businesses and family farms. No guidance is provided for what constitutes a small business or a family farm, and no detail is provided as to whether the $10 million is based on the value of assets or the amount of previously untaxed capital gain. Also, in the case of married couples, there is no explanation whether the tax would be imposed at the first spouse’s death or deferred until the second spouse’s death.
No information is provided on whether the gift and generation-skipping transfer taxes would also be repealed. That said, in order to protect the capital gains tax at death, either some form of tax on lifetime gifts of appreciated assets would have to be imposed, or such gifts would have to trigger the capital gains tax. (Many believe that these proposals are based on the Canadian tax law, which imposes a capital gains tax on the net capital gain inherent in a decedent’s assets at death, as though those assets had been sold. Under the Canadian system, an exemption is provided for transfers to the decedent’s spouse. The Canadian tax law also imposes the capital gains tax on gifts of appreciated property.)
What Estate-Planning Steps Should You Consider Now?
Many of our clients are contemplating intrafamily asset transfers in anticipation of new regulations under IRC Section 2704 that many feared could become effective as early as next January. Given the uncertainty created by possible changes in the law, and the rapidly diminishing likelihood that the Section 2704 regulations will become effective anytime soon, we recommend that you call us to discuss any pending or contemplated transactions. Some transactions may still make sense depending on your goals, especially if you reside in a state that imposes an estate tax. Other transactions may best be deferred.
The president-elect’s website also contains some information on his plan for income taxes. He would seek to reduce the highest marginal income tax rate on individuals to 33 percent, from its current 39.6 percent rate. Married couples filing a joint return would pay this rate on their taxable income in excess of $225,000, and unmarried individuals would pay this rate on their taxable income in excess of $112,500.
The plan would retain the current capital gains tax rate of 20 percent, but would repeal the 3.8 percent Medicare tax on net investment income and also the alternative minimum tax. Itemized deductions would be capped at $200,000 for married couples filing a joint return and $100,000 for unmarried individuals. Tax subsidies would be provided for childcare and eldercare.
The corporate income tax rate would be reduced to15 percent from its current level of 35 percent. The corporate alternative minimum tax would be eliminated. Although most business deductions would be eliminated, United States manufacturing businesses would also be able to elect to deduct all of their capital expenditures in the year incurred in exchange for giving up the interest deduction on their indebtedness.
The website actually refers to the “business tax rate” being reduced to 15 percent, for “all businesses, both small and large, that want to retain profits within the business.” Many have interpreted this to mean that S corporations and partnerships could elect to retain profits and pay only the 15 percent tax. Presumably the owners of those entities would not be taxed until such retained profits were distributed.
The president-elect has said he favors repeal of the “carried interest” tax benefit; however, that is not discussed on his website.
Multinational corporations with untaxed offshore profits would be subject to a one-time 10 percent tax on such amounts and then could repatriate their offshore amounts without any further federal income taxes. Going forward, the earnings of foreign subsidiaries would be subject to current taxation.
We will of course continue to keep you posted on future tax law developments.