Country / Language

President-elect Trump's Proposed Tax Plan: What You Should Be Thinking about Now


12/7/16

Synopsis

President-elect Donald Trump will be coming into office with a comprehensive tax plan designed to shake up the status quo. Although Mr. Trump’s plan will likely take months or longer to implement, we believe there are opportunities for our clients to take some important tax planning steps over the next few weeks. Despite the fact that Mr. Trump’s tax plan still has many unknowns and no guarantees, preparation for next year and beyond should start now. 

Issue

Here are some potential actions that we are advising our clients to consider right now.

  • Do not take distributions from foreign subsidiaries as there may be a tax holiday for repatriated money from overseas. If your organization is a C corp, it has an opportunity for a reduced repatriation rate similar to the rate that was established in 2005.
  • As an individual or flow-through entity, you can likely avoid the net investment income tax (NIIT), if eliminated, that would apply now and you may benefit from a lower capital gains rate next year. While Obamacare could be repealed next year, the NIIT might be left in place until an Obamacare alternative is available.
  • Since tax rates may be higher now compared to next year, doing a cost segregation study this year would potentially yield greater tax benefits.
  • Under President-elect Trump’s tax plan, carried interest would be taxed at ordinary income tax rates. 
  • Since President-elect Trump’s tax plan would reduce the top tax rates for businesses and individuals generally, deferring income and accelerating deductions, such as state and local taxes and charitable contributions, may make sense. However, the alternative minimum tax (AMT) needs to be considered. Under Trump’s proposed plan, deductions for individuals will be capped at $200k for married taxpayers ($100k for individuals) with the AMT eliminated. Projections will be needed for this year and next.
  • Many business provisions may be eliminated, except those related to the R&D tax credit. It would make sense to explore the existing provisions you may qualify for now.
  • Businesses may be able to immediately deduct the cost of asset acquisitions. Those businesses that fully deduct asset costs will not be permitted to deduct interest expense on any borrowing, a provision that’s intended to reduce corporate dependence on debt.
  • We do not anticipate an immediate repeal of the estate tax. If this does happen, it may take some time and probably would not be retroactive. Additionally, the federal estate tax has been repealed in the past – and has subsequently returned at least three times. Economics could cause that to happen in a future administration. Even if the federal estate tax is eliminated, there are still a myriad of tax planning opportunities to consider. The President-elect’s proposal would replace the federal estate tax with a capital gains tax at death. In other words, the assets will be deemed to have sold as of the moment of death and the estate would be liable for tax of 20% on the growth between the decedent’s basis and the fair market value at death. This tax would be computed on gains over $10 million and payable at death. If the estate is under $10 million, the tax is due only upon sale of those assets. 


While the Republican platform clearly includes estate tax repeal, the fate of the federal gift tax remains uncertain. The current consensus among leading wealth transfer strategists - including CohnReznick professionals - is that the federal gift tax may remain in some form to prevent wealthy taxpayers from purging their estates to avoid an immediate capital gains tax on assets with a combined value exceeding $10 million at death. Further, if Treasury limits the usage of discounts on gift transfers, taxpayers may find it more difficult to leverage wealth from their estates so that their heirs can defer capital gains tax until the actual sale of inherited assets. This could prove problematic, particularly for business owners with fairly illiquid estates.

Regardless of whether the federal estate tax will remain, planning remains important for asset protection and to hedge against the taxes imposed by states which decoupled from the federal estate tax years ago. With some states’ estate taxes as high as 20%, repeal would erase any federal tax benefit from paying those taxes. Add to that the proposed federal capital gains tax of 20% on the appreciation of assets and it is easy to see how some taxpayers may be facing a substantial tax burden.  

Here are some additional reasons why tax planning should commence now: 

  • Transferring assets into a trust now would help to defer the capital gains tax until the asset is sold. This could be particularly important for closely-held business owners who may be unable to liquidate assets quickly in order to pay taxes. Transferring assets to trusts is still important for asset protection and business succession purposes. Trusts also serve an important function in ensuring that assets will be devised as the owner directs.  
  • There is still a chance that Treasury will adopt some form of the regulations that limit the availability of minority discounts on the transfer of closely-held business interests. While we don’t expect that the proposed 2704 regulations will be finalized in their current form before the Inauguration, and we certainly admit that the climate for adopting the proposed regulations has changed significantly with the election, taxpayers should be prepared for the possibility that discounts could be limited in the future. If you are currently in the process of planning to make transfers before the election, you should continue that process.  
  • Insurance planning remains relevant in order to ensure that there will be sufficient liquidity. Whether there is an estate tax or not, we recommend that life insurance always be held within a life insurance trust, primarily for asset protection purposes.


It is important to note that there is no agreement by Congress on the final reform plan. The Administration-elect and the House GOP plan differs from the Senate Republican plan, which is limited at this time to Corporate Integration. CohnReznick will continue to keep you posted on changes that impact tax planning.

Contact

Please contact your CohnReznick tax partner to discuss these considerations.

Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. 

Search Our People

Search Our People

Look ahead. Gain insight. Imagine more. Is your business ready to break through?

View our new TV commercial..

Industry Outlooks

Industry Outlooks

Gain insight into what is ahead for the Commercial Real Estate, Technology and Middle Market Private Equity industries.

READ MORE

Learn about our upcoming events.

READ MORE

Working With Us

Working With Us

What makes CohnReznick different from others in our profession? And what should our clients come to expect when working with us? The answer is The CohnReznick Advantage. Contact us to learn how we can out the CohnReznick Advantage to work for your business.


People

The value of an organization is determined by the skills and qualities of its leaders. With more than 280 partners serving clients nationwide, CohnReznick is renowned for the diverse experiences, knowledge and backgrounds of its leadership.

Learn More

Services

We align our services in three segments: Accounting and Assurance, Tax, and Advisory. This approach allows us to provide holistic solutions to complex business problems and to seize upon opportunities requiring an integrated approach.

Learn More

Industries

Accounting and tax issues different significantly based on an organization's industry. We provide clients with expertise in nearly two dozen industries – we know the opportunities, the obstacles, the competitive landscape.

Learn more

Insights

CohnReznick professionals are thought leaders in their industries. Clients benefit from relevant and timely economic, legislative and industry insights that can keep them a step ahead of competition.

Learn More

Global Reach

Our involvement in the Nexia International network of firms enables us assist our clients wherever they do business-providing local expertise and connections wherever they needed. Nexia is comprised of 20,000 professionals operating in over 100 countries.

Learn More