The Trump Presidency and Taxes

November 11, 2016

Mainstream America had a shock last Tuesday with the election of Donald Trump. The predictions of the American press were totally wrong. We also had a reminder about how out of synch California is with most of the rest of the country, although Hillary Clinton did have a majority of the popular vote.

Now we have to live with the reality of a Trump presidency. I hope that his positions will moderate from his campaign promises when he considers the consequences of his proposals. I also hope he chooses some great advisors and listens to their advice. I also hope he exhibits more restraint and self-control as President. Our country is seriously divided and must be healed.

Trump has never had the experience of working with the checks and balances of Congress and the Judiciary. His power as President is limited, and requires getting the cooperation of others. Diplomacy, not bullying, is required for a successful Presidency.

Trump has the advantage of having Republican majorities in both the Senate and the House of Representatives. Since he has represented himself as an "outsider," he might not get the cooperation from Congress that you would otherwise expect.

High-income and high net worth taxpayers have dodged a bullet. Hillary Clinton had proposed increasing income taxes for high income taxpayers, decreasing the estate tax exemption for high net worth taxpayers and raising the maximum estate tax rate. The IRS proposal to attack family limited partnerships might be moderated or withdrawn.

One group under attack by both Trump and Clinton is venture capitalists and hedge fund managers. Historically, part of their compensation, called "carried interest," has been taxed as long-term capital gains. If Congress goes along with the change, this compensation will be taxed as ordinary income and subject to self-employment tax. This could have some impact on the venture capital industry, which could hurt new business growth.

Trump has proposed reducing the current seven tax brackets to three: 12%, 25% and 33%. (The current maximum tax rate is 39.6%.) He would eliminate or cap itemized deductions. He has proposed a 15% tax rate for businesses, including self-employed individuals. The long-term capital gains rates would be retained, including the current 20% maximum rate.

Trump has proposed repealing health care reform - including the 3.8% net investment income tax and the .9% Medicare surtax.

Itemized deductions would be capped at $100,000 for singles and $200,000 for married couples filing a joint return.

The standard deduction is proposed to be increased to $30,000 for joint filers and $15,000 for singles.

Personal exemptions are proposed to be eliminated.

Dependent care credits and incentives would be expanded.

The alternative minimum tax would be repealed. This change would substantially increase the advantages of incentive stock options and simplify tax planning for them. Unanswered question: how will taxpayers get the benefit of unused minimum tax credit carryovers?

Trump has proposed repealing the estate tax. To compensate, the "step up" (or fresh start) in basis to the fair market value on the date of death would be eliminated for the amount of estates exceeding $10 million per married couple, $5 million for singles. This will create recordkeeping headaches for some taxpayers.

For businesses, Trump has also proposed increasing the limits for expensing equipment, especially for manufacturers.

Trump has said that he wants to create tax penalties for companies that move manufacturing and other jobs overseas. This would increase costs for most major U.S. businesses, and would probably result in higher prices for consumers. (I'm betting Congress will fight him on this one.)

Trump has proposed a 10% tax on the untaxed foreign income held abroad of U.S. multinational companies. As I understand it, these companies could then repatriate these funds without a further tax, which should bring additional funds for potential investment into the U.S. economy.

His proposals would substantially reduce federal tax revenues, and Congress might decide our country simply can't afford them.

If Trump's tax proposals are enacted, I would say, "Make hay while the sun shines!" It may be the time to recognize long-term capital gains and accelerate income. There is a possibility he will only have a four-year presidency if there is a progressive backlash in our country - especially if he doesn't moderate his behavior and American voters becomes disenchanted or bored with him.

Yours truly,
Mike
Michael C. Gray


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Michael Gray, CPA
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