Since President Donald Trump’s inauguration on January 20, the only real constant seems to be that nothing, other than 3 a.m. tweetstorms, can be predicted. From immigration to foreign policy to health care, it’s all been in flux. Because of this, everyone from Germany’s Angela Merkel to Pope Francis is preferring a wait-and-see approach to the Trump Presidency.
When it comes to tax planning under President Trump, however, wait-and-see may not seem like a comfortable strategy for most. Unfortunately, absent any legislation or firm policy, this might be where we are for the foreseeable future. Until Trump and Congress pass the 2018 budget, there will likely be continued uncertainty. There are, however, a few things that we do know or can predict.
Shifting Brackets, Lost Deductions, Pros and Cons for All Income Levels
During his run for President, Donald Trump campaigned heavily on the promise of tax cuts for the middle class. This has continued since he took office – though some have raised concerns about how deep, in fact, those cuts will be.
For those in higher income brackets, however, there is likely fairly good news. President Trump has indicated he would like to reduce the number of tax brackets from the current seven down to just four. The top tax rate would also fall from 39.6 percent to 33 percent, a substantial decrease.
President Trump has said he would like most itemized deductions eliminated in favor of an increased standard deduction. He has proposed a $15,000 standard deduction for single filers (up substantially from $6,300) and $30,000 for married couples filing jointly (currently $12,600). This would likely benefit individuals with moderate incomes who do not usually have many deductions. Conversely, those in the higher tax brackets who traditionally rely on deductions to reduce their tax burden may, in fact, end up paying more.
Those in the lowest tax brackets – particularly single parents or people who rely on personal exemptions – may lose out the most. Trump’s plan calls for the elimination of most personal exemptions as well as the head of household filing status. That could see more than 20 percent of U.S. households paying more tax under Trump.
An End to the Death Tax? Maybe.
President Trump also campaigned heavily on repealing the federal estate tax – which he calls the death tax. If it happens, that will likely be welcome news to high net worth individuals, though it will directly affect only a very small percentage of the U.S. population as a whole.
The federal estate tax repeal might not be quite the gift, however. Trump has said he will bring in a capital gains tax for estates, though it would have an exemption of $10 million to give some protection to small businesses and farm owners. A capital gains tax would also require more administrative work to calculate, and could end up costing more. At the very least, it will add significant – and likely unwanted – complexity to estate planning.
While You Wait: Prepare, Prepare, Prepare
Though wait-and-see seems to be the best approach to tax planning under President Trump, at least at this point in his administration, this does not mean adopting a hands-off stance. In fact, during periods of uncertainty such as this, it pays to be prepared more than ever.
If you have not done a thorough review of your tax plans in awhile, this would be the time to do it. The only way to react to unforeseen changes is to stay nimble, and that means knowing exactly where you stand.
The ultimate impact of a change in tax brackets might be unknown, but it is likely a good strategy, especially for those with higher incomes, to defer as many realized gains as possible. There may be lower taxes under Trump, and this would position you to take advantage.
For those with significant estates, while an appeal of the federal estate tax is likely, it is not quite the cause for celebration that it may seem. If President Trump brings in a capital gains tax for estates, you will likely be spending much more time documenting assets. It would be wise to begin that process now in advance of any changes.
Don’t Go It Alone
We have all gotten used to how tax policy worked under President Obama. Any new administration, particularly a Republican one, was bound to introduce changes. President Trump, however, is a true wild card – and something very few people had planned for.
Now is not the time to put your tax planning on autopilot or think that because you’re in a particular tax bracket you will see nothing but benefits under Trump. He may surprise us all. This is when an experienced tax- and estate-planning attorney can definitely be an asset as you try to prepare for and navigate what comes next.