Tax Law change under the new Trump Administration? Maybe, but too soon for planning

Enacting Major Changes Will Take Time

President Trump made tax reform a key issue in his campaign. He is now president and Republicans are in charge of the House and Senate, so the likelihood of overhauling the federal tax system is better than they have been for decades.

However, President Trump and Congress are trying to enact changes to the Affordable Care Act as well as addressing budget issues and foreign relations. Also, dealing with all the recent hearings involving the FBI have diverted attention. Finally, there are many details that need to be worked out, making it unlikely that major changes will happen until 2018.

Change in IRS Regulations

President Trump has already made changes in IRS regulations. On his first day in office, he temporarily froze tax regulations and then shortly thereafter, ordered that two existing regulations had to be removed for each one that was added. What is the impact?

  • The Trump administration has stated that the two-for-one exchange rule only applies to significant regulatory actions. The rule may not affect the many IRS regulations that are procedural in nature or are needed by taxpayers.
  • One new regulation that has been threatened is the Department of Labor’s new fiduciary rules for retirement advisers. This updated regulation requires retirement advisers to act in their clients’ best interests, which is a stricter standard than was previously required.
  • Also affected are the new partnership audit procedure. A 2015 law streamlined the exam process of large partnerships. The IRS released proposed regulations which implemented the regime on January 18. However, it later pulled the regulations in response to the freeze.

Possible Tax Law Changes – Lower Corporate Tax Rate

Currently, the corporate tax rate tops out at 35%. House Republicans want to lower it to 20% with 25% for businesses that pass income through their owners and for those that are self-employed. President Trump is calling for a 15% corporate tax. In 2014, nearly 25 million Americans filed taxes as sole proprietors (Schedule C), so the change affects many taxpayers.

Tax strategy: Under this change, individuals who are high-earning could become independent contractors or set up LLCs to shift income and advantage of the lower corporate tax rate. Additionally, those who own pass-through businesses could reduce their salaries and take higher profits.

This is how residents of Kansas responded to a similar state law. The state is now working to repeal a law passed in 2012 that exempted pass-through firms from state income tax. The result was that many individuals and businesses in the state restructured their business as pass-through entities or created new businesses to take advantage of the tax break. In just a few years, the number of pass-throughs in the state almost doubled. The state is now facing a large budget deficit as a result because the pass-through exemption is estimated to have cost the state $472 million in 2014 alone. The cost for 2015 was even higher.

The impact of this tax strategy on the 15% tax at the federal level would be expensive. It is estimated to cost up to $1.95 trillion in lost tax revenues over the next ten years. The Trump administration is considering ways to prevent abuse of this low tax rate but any attempt to prevent gaming the system will likely add more complexity to the tax code. Tax-savvy practitioners will likely still be able to find loopholes.

Tax only on Income Earned inside the US

Worldwide income is taxed presently, with credits for foreign taxes paid. The proposed law would generally tax only income that is earned within U.S.

Multinational Tax: A new, low tax on multinationals is part of the proposed tax, added to raise revenue to fund other rate reductions.

Estate Tax Repeal

Republicans would like to repeal the estate tax. President Trump would impose a tax on pre-death appreciation of assets, with a $10 million per couple exemption. There would be no step up in basis at death. And it is likely that gift tax rules would be retained.

Even if the federal estate tax law is repealed, many states will continue to impost a tax. Massachusetts only exempts $1 million of assets passing to someone other than a spouse, such as a trust. New York and other states have higher exemptions. Thus, planning is still important for most people.

Planning Opportunities

With the uncertainty of any change being enacted, this is not an easy year for planning. For example, this may not be the year for a Roth conversion, if tax rates will go down next year. It may not be the time for complex estate planning techniques involving irrevocable transfers, if the estate tax is eliminated in 2018.

We will keep monitoring this to assess any moves that do make sense and update this post when the likelihood of real changes becomes clear.

Tax Law Changes Coming, including raised capital gains and dividend tax rates

This month, President Obama released his proposed FY 2014 budget which contains new taxes, limits on deductions, and other changes intended to meet the goal of raising more than $580 billion in revenue.
The most significant of these is the termination of capital gains breaks and qualified dividend treatment, causing them both to be taxed as ordinary income. The Kiplinger Tax Letter suggests taking capital gains before 2015 to lock in the lower rate. However, as always, do not let a tax strategy override a good investment plan.
Here is a summary of other changes that may affect you:
The 28% Limitation:
• Affects married taxpayers filing jointly with income over $250,000 and single taxpayers with income over $200,000.
• Limits the tax rate at which these taxpayers can reduce their tax liability to a maximum of 28%.
• Applies to all itemized deduction including charitable contributions, mortgage interest, employer provided health insurance, interest income on state and local bonds, foreign excluded income, tax-exempt interest, retirement contributions and certain above-the-line deductions.
The “Buffet Rule”
• Households with income over $1 million pay at least 30% of their income (after charitable donations) in tax.
• Implements a “Fair Share Tax,” which would equal 30% of the taxpayer’s adjusted gross income, less a charitable donation credit equal to 28% of itemized charitable contributions allowed after the overall limitation on itemized deductions. The Fair Share Tax would be phased in, starting at adjusted gross incomes of $1 million, and would be fully phased in at adjusted gross incomes of $2 million.
Estate, gift, and generation-skipping transfer (GST) Tax
• Reintroduce rules that were in effect in 2009, except that portability of the estate tax exclusion between spouses would be retained.
• This change would take effect in 2018.
• Top tax rate would be 45% and the exclusion amount would be $3.5 million for estate and GST taxes, and $1 million for gift taxes.
The Kiplinger Tax Letter anticipates the changes being acted on as early as 2014. On April 23, 2013, Max Baucus (D-MT), the head of the Senate Finance Committee, announced he would retire from the U.S. Senate at the end of his term in 2015. In The Kiplinger Tax Latter, Vol. 88, No. 9, Kiplinger predicts that “he’ll push to make revamping the tax code his legacy.”
You may feel as though you are done with taxes and do not need address them for another year. Resist that urge and schedule a meeting with us so we can review the potential impact of proposed tax changes on your portfolio and investments. We can also discuss the best strategies for saving money on your 2013 and 2014 tax returns.

Planning for Tax Law Changes – the Investment Piece

Among the anticipated changes in taxes for individuals are the increase of the long-term capital gains rate from 15% to at least 20% and the elimination of the qualified dividend rate of 15%. How do you respond? That depends on several factors.

If the investments are tax-sheltered, as in an IRA or 401(k) plan, then the change has no impact: current growth is sheltered and withdrawals are always taxed as ordinary income. If the investments are in a taxable account, then the analysis involves your long-term plans and investment style. On the long-term capital gains, if you may be selling investments soon, doing so now and buying back (subject to the wash sale rules, if applicable), would increase your basis so that less would be taxed later at a higher rate. However, if you plan to hold investments long-term, there is little reason to react now. That is, the increased tax far in the future is less, on a net present value basis, than paying a lower tax today.

The long-term capital gains tax is still likely to be less than the maximum marginal rate, so converting what would be earned income into capital gains remains attractive (e.g., the basis for exercising and holding Incentive Stock Options)

As for the dividends tax, again this depends on your investment strategy. If you believe that the proper stocks or funds include those that distribute dividends, then the tax cost is part of your analysis in selecting those investments over funds or stocks that do not pay dividends.

As with any decision regarding the tax impact on investments, it is the investment strategy that should rule the outcome.

We will report more on possible tax changes and related strategies in upcoming newsletter posts.

Let us know if you have questions or comments. Thanks,


Tax planning: 2009 tips and traps, and 2010 changes

Tax law changes for 2009 will require you to submit more information to your tax preparer to ensure that you get the most of tax credits and deductions. If the person working on your tax returns does not have all the proper information, you could pay too much or your return could be rejected.

Here is an overview of tax changes to consider when gathering your information:

* Making Work Pay Credit (“MWPC”), is a $400 credit to offset a reduction in withholdings enacted early in 2009. It is phased out for higher income and offset by the Economic Recovery Payment, described below. You could end up owing taxes if the credit does fully offset the reduction in withholdings (affects 2009 and 2010).
* Economic Recovery Payment (“ERP”) is a payment received as part of your social security benefits (for 2009 only), and affects the MWPC so that failing to report it could result in your tax return being rejected. The payment itself is not taxable.
* Government Retiree Credit (“GRC”) is for those not receiving social security, but affects the MWPC (2009 only). The new Schedule M reconciles the MWPC, ERP and GRC so you need all the information.
* First Time Home Buyer’s Credit is a $8,000 credit that applies to first time buyers purchasing between certain dates and requires a paper filing (electronic filings will not get the credit). If you buy the home in 2010, you have the option of amending your 2009 taxes for the credit. Note that this credit gets repaid over time on future tax returns beginning in 2010.
* Tax credit for long term home owners buying a new home, between certain dates, also requires a paper filing to avoid being rejected.
* American Opportunity Tax Credit (an expanded Hope Credit) allows use of the credit for two year more years than the Hope Credit, covering junior and senior years of college when the Hope Credit was not available.
* New Vehicle Purchase sales tax deduction (2009 only) is an additional Schedule A item, so long as your are not taking the general sales tax deduction.
* Energy Credit for solar power, fuel cells and certain energy efficient improvements are Schedule A deductions. There are two types of credit depending on what improvements were made to your home and taking the deductions requires you to have documentation.
* The Cash for Clunkers voucher is not considered income (2009 only).
* A tax refund can be used to buy U.S. Series I bonds.
* There is an AMT patch which helps for 2009, but falls back for 2010.
* There is an increased casualty and theft loss limit that helps for 2009.
* Note that a dependent child’s income is taxed when it exceeds $1,900.
* The Tuition and Fees Deduction applies to 2009.
* Unemployment Compensation has $2,400 excluded from taxable income (2009 only).
* Educator’s Expense enhanced for 2009.

Note that not all states accept the IRS changes, so the information and outcome could be different.

For 2010, some old provisions return and some new changes require action now:

* 2010 conversion to a Roth IRA has no income limit and two years to pay the taxes (please see To convert or not traditional IRA to Roth IRA).
* Certain changes lost for 2010 worth repeating (see What to watch out for in 2010 – investing, taxes and more):
* AMT patch falls back;
* Casualty and theft loss limits fall back;
* Educator and tuition and fees deductions against adjusted gross income are not available;
* Deduction of state and local sales taxes ends;
* Exclusion of $2,400 of unemployment income ends; and
* Exclusion of income from qualified distributions from IRAs to charities ends.
* The estate tax still has not been enacted retroactively, as expected (see Estate Planning – will we have a new tax law in time).

As we said before, tax planning involves a multi-year view to optimize what you end up paying (please see More Strategies – Three Year Planning…., Tax Credits and all Continued, and What to watch out for in 2010 – investing, taxes and more)

Let us know if you have questions or comments. Thanks,


What to watch out for in 2010 – investing, taxes and more

With a new year begun, now is a good time to take stock of your finances. Below are a series of areas to address. If you have questions or comments, please let me know Contact Us


The markets were up in 2009, some by over 70%, especially low grade stocks and bonds or what some have called a “junk rally”. Should you expect the same for 2010? Is there “a new normal” to which you need to respond?

If you have read any of my Newsletters, you know my response: last year’s winners usually perform poorly in the following years; many individual investors buy these investments anyway, making it more difficult for fund managers to produce results (it is harder to find good investments when you have a great deal more to invest); individual investors also often sell investments that historically go up; any thesis about a “new normal” tends to either ignore long-term lessons of history or be a flashy way of pitching a tactical move that could make sense, but only if you know when to sell as well as when to buy; and what is out of favor usually returns to favor, so that the more stable stocks and bonds that seem too boring to buy could be the right investment to be making now, as so often investment returns track back to the norm over time.

Studies show that, on average, mutual funds over decades fared slightly worse than their respective indices but individual investors did far worse. On the last point, there is a good article entitled “Stop Listening to Jim Cramer” found at Stop Listening to Jim Cramer. The point of this and some other authors worth noting is that prudent investing requires a long-term strategy, and with it the urge to resist trying to pick winners based on a fad, their most recent performance or some other short-term gauge (see The Biggest Mistake Investors Make). Investing in index funds is very boring, but the fees are low and these funds often do well over time.

So what do you do? First, create or update your investment allocation with a long-term view that does not respond to fads. This is essential. Second, rebalance at least annually, selling the excess of your winners to buy your under-performing funds. Historically, this is a way to sell high and buy low. Third, as a tactical move, consider funds investing in large cap US stocks, dividend paying stocks, and adding or increasing your allocation to international stocks. Also, use bond funds that have short-term durations and try to find bond or convertible bond funds that are buying or holding bonds that are discounted. Finally, consider adding commodities as further diversification, with the goal of obtaining gains from either new building, especially in foreign markets, or the chance that we have inflation instead of deflation.

Tax law changes

In my 2009 year-end tax planning Newsletters, I highlighted Roth conversions and other ideas that still apply in 2010. I also pointed out that, with the Bush tax cuts expiring and the need to cover deficits, counting on marginal income tax rates to rise is a safe bet. (Please see Three-year Planning for this year-end and Year-end Tax Planning – Tax Credits – Continued)

This means that you should maximize your contributions to your 401(k), SEP or 403(b) plans, use your HSA or FSA, avail yourself of the first-time home buyer credit and even sell stocks and bonds to reset the basis before the long term capital gains rate rises.

With respect to the Roth conversion, you get two years to pay the taxes for a conversion in 2010. However, the 2011 rate could be higher so this may not be an option worth taking.

In the end, we all need to follow what Congress does to update our strategies during the year.

Estate tax update

Congress is expected to reinstate the estate tax retroactively to January 1. However, instead of the $3.5 million credit and 45% rate, there are some pushing for $5 million and 35% who may win in a compromise. We will update you when we know more.

Also, remember to use your $13,000 annual exclusion for gifting strategies.

Credit – mortgages, cards, etc.

Check your mortgage rate against what you can get on refinancing now. Rates are still low so you may be able to save. Also, if your appraised value is less than the mortgage, there are government programs to help (see Making Home Affordable – refinance eligibility).

If you have not purchased a house, rates are low as are home prices, so this could be a good time to act. First time home buyers have the tax credit as an extra incentive (as mentioned above), if they can act in time.

There are actions to take regarding your credit rating and use of credit cards. Monitoring your credit score will let you know if you can qualify for good loans and credit cards, as well as alerting you to any potential identity theft.

Check to see what accounts are open and use them, reasonably. An account that is not used can be closed under the new banking laws, which has a negative impact on your credit score.

If you do have higher fees or rates imposed, fight to see if you can get your old terms back. Many notices are sent without real scrutiny of your particular situation so, if you have a good history, you may win this fight. Also, opt out of the overdraft fees ($39 per time you go over your credit limit).

If you are looking for a new card, consider credit unions, as their rates are capped, unlike other credit card issuers.

Finally, consider adding a child who is in college to your card, because the new law requires them to prove sufficient income to afford the payments.

Estate plan and life insurance

As noted above, we await action from Congress on the federal estate tax.

However, you still need to make sure that your current will/trust/durable power of attorney/medical directive/etc. work under state laws, have all the people you still want as your fiduciaries and reflect any other changes you have experienced. If not, you should update these documents.

Other financial matters

Do you have an umbrella policy? Did you buy or update your disability policy? Have you checked to see if you can get a better deal on your auto insurance? Would increasing the deductible make sense for your risk tolerance and cash flow?

There are many other items to review. Please check out Finance Health Day – your own financial planning focus


Even if 2010 is not a repeat of 2009 for investments, there are many steps to take to make certain that you are in an optimal position on all your financial fronts.

Let us know if you have questions or comments. Thanks,