Personal Finance

Tax Reform Proposal: Things to Consider

Senior Estate Planner Mike Repak explains some of the implications of certain aspects of the current House tax plan proposal.

Significant tax law changes and rate reductions are currently being considered by the GOP Congress. Constitutionally, tax bills have to originate in the House, but you can be sure that the Senate is already considering their ideas as well. Although the process still needs to unfold a bit more to gain a good sense of what the final product will be, both President Trump and the House GOP (i.e., Paul Ryan) have revealed enough of their thinking about what the final bill might contain.

Perhaps the most significant item will be a reduction in the top corporate income tax rate from 35% to possibly 20%. However, individual income taxes are likely to be changed significantly as well. Both Trump and Ryan are proposing to reduce the individual income tax rate structure from the current seven brackets with a maximum rate of 39.6%, to three brackets with a maximum rate of 35%. The Trump plan and Ryan plan both proposed the elimination of the individual Alternative Minimum Tax system, and both seek to simplify taxes by replacing many itemized deductions and personal exemptions with a significantly larger standard deduction.

One of the more controversial proposals is to eliminate the deduction for state and local taxes, which has been part of the Federal income tax law since it began over 100 years ago. Trump’s original plan expands the preferential tax treatment given to qualified dividends and capital gains in order to include some investment interest income. Both plans would provide for increasing the tax benefits that may be claimed by taxpayers for paying for child care, and the Trump plan allows a similar tax benefit for elder care expenses as well. In an effort to keep the new tax law more revenue neutral, a recent GOP proposal has called for a sharp reduction in the pre-tax contributions to 401(k) plans, although the President has indicated that he is not in favor of this change.

Both Trump and Ryan are proposing to eliminate Federal estate taxes. Trump’s proposal would replace the current system with a capital gains tax on a decedent’s estate at a top rate of 20%, applicable to estates over $10 million. This could cause some significant changes in how estate planning drives behavior. For example, while current law makes it more advantageous for taxpayers to hold low-basis, highly appreciated assets until death to get a step-up in basis, a new system might create an incentive for people to either sell those assets since the capital gain tax is unavoidable or use those assets for gifting so the next generation can determine when to sell and thereby trigger the capital gain tax.

Of course, without mitigating these tax reductions, the Trump plan and Ryan plan would both lead to a decrease in Federal revenues and an increase in the annual deficit. Considering that the Federal debt is approaching $20 trillion, it may be reasonable to expect some political opposition to these changes, even if they are intended to stimulate the economy. While the GOP controls the White House and both houses of Congress, the majority in the Senate is not large enough to be filibuster proof. The GOP may decide to attract some Democratic support by adding a few provisions favored by the Democrats to ensure passage in the Senate, or it may break the more objectionable changes into a separate bill which it would pass using “reconciliation,” requiring only a simple majority in the Senate.

Even though many details remain unsettled and it’s just too soon to tell when any changes might be effective, it may make sense for individuals to defer income from 2017 into next year and accelerate deductions into 2017. Once the changes become clearer, individuals should plan to discuss the impact of these changes with their advisors to determine what changes may need to be made to retirement and/or estate plans, and also whether the new law presents opportunities to reconfigure retirement savings (i.e., Roth conversions) or take advantage of new investment arithmetic.

Michael Repak, CPA/PFS, JD, LLM
Vice President/Senior Estate Planner

Mike provides advice and guidance in all aspects of financial, tax, and estate planning issues. He earned his Bachelor’s degree from William Paterson University in Wayne, New Jersey, and has a Master’s degree from the University of Wisconsin in Madison, Wisconsin. He has a CPA/PFS credential, and Series 7 and 66 securities licenses. He received his J.D. from the University of Florida and his LL.M. in Tax Law from NYU. 

He has been an adjunct professor in the MBA program at Temple University and is a sought-after speaker for professional conferences and events. He is also frequently featured as a Money Doctor on, the public education site of the American Institute of Certified Public Accountants. Mr. Repak has served on several non-profit and civic boards, is a graduate of Leadership Philadelphia, and a member of the Union League of Philadelphia.

Janney Montgomery Scott LLC, its affiliates, and its employees are not in the business of providing tax, regulatory, accounting, or legal advice. These materials and any tax-related statements are not intended or written to be used, and cannot be used or relied upon, by any taxpayer for the purpose of avoiding tax penalties. Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation or needs of individual investors.

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