As Trump pushes for tax overhaul, wealth advisers say, ‘wait and see’


Donald Trump made it clear during the presidential campaign that he wanted to cut taxes to spur economic growth. With Congress back from its summer recess, the president may get the chance to do just that — though analysts and wealth advisers are less confident that he will get wholesale tax overhaul.

With any tax plan, the devil is in the details. And with this one, the details have been few. At the end of April, Treasury Secretary Steven Mnuchin and Gary D. Cohn, the director of the National Economic Council, unveiled the plan, written on a single sheet of paper with tax proposals listed as bullet points.

Because changes are expected for business, income and so-called transfer taxes — those levied on estates and gifts — the lack of details has wealth advisers urging caution to clients asking the most natural of questions: What does this mean for me?

More from New York Times:
How to protect your information online
Using Silicon Valley tactics, LinkedIn’s founder is working to blunt Trump
Graydon Carter’s varied interests and influence

“We’re all Pavlovian when it comes to taxes,” said Jayne Hartley, director and senior wealth strategist at Union Bank in San Francisco. “We groan when we hear we’re paying a new tax. We cheer when we hear a tax cut is coming.”

With meetings over tax policy having started this week, what follows is an attempt to lay out when people might groan or cheer in the months ahead.

What might happen?

Federal tax rates seem poised to change, although whether they will do so as part of a full-fledge tax overhaul is still to be determined. President Trump has charged lawmakers, back from their summer break, with pushing through changes to business and income tax rates.

Todd Simmens, national managing partner of tax risk management at BDO, a tax and accounting consulting firm, spent three years with the congressional Joint Committee on Taxation that produced the last big tax overhaul package in 2001. He said congressional staff members were considering several possible courses of action, but they have so far received little guidance from the president.

He is doubtful that a wholesale overhaul can happen before the end of the year and predicts that if it does not get done early next year, the effort will get bogged down by the midterm elections.

“There are too many other things in the air that will keep this from getting to the front burner,” Mr. Simmens said. “Tax policy is more complex than health care repeal and other policy issues we hear about. You’ve got groups who are interested in their piece and have been lobbying for it.”

What he does expect is piecemeal changes to the tax code, particularly with business and income taxes. But if Washington tries to tackle bigger issues — like a repeal of the estate tax — the trade-offs could create more work and confusion.

Business tax

Mr. Trump’s initial one-page plan on tax changes called for the corporate rate to be reduced to 15 percent, from 35 percent. Few analysts believe the corporate tax rate could go this low, but it could drop to 20 or 25 percent.

For affluent business owners, there could be a real advantage if the lower rate applies not just to corporations but also to so-called pass-through entities. These are companies, like limited liability corporations, for which the business owners claim the revenue on their personal income tax returns. For a high-earning company, that could be 39.6 percent at the federal level alone, before the 3.8 percent Medicare surcharge and state and local taxes are calculated.

If a lower corporate rate were applied to pass-through entities, it could give small businesses more working capital. As it stands now, business owners must file quarterly tax estimates and pay the tax at the individual rate — even if they expect their business to slow down in the next quarter. A change would give them more money to invest in their business or help it weather slumps.

“You’d have more working capital to do other things,” said Joseph J. Perry, the tax and business services leader at Marcum, a national accounting firm. “If I can invest that money in my business and make more money, then I should leave it in my business. If you leave the money in the entity and it gets taxed at 15 percent, you haven’t used that money personally.”

When business owners take the money out for personal use, they would presumably pay an additional tax. This adds a layer of complexity, but it may be worth it for business owners.

“Once we see what it looks like, there is going to be a lot of planning for business owners,” said Ms. Hartley, the Union Bank wealth strategist. “The question is, are they going to wait and see what others are doing or do they have a team of professionals already set aside?”

Income tax

Mr. Trump’s proposal of cutting the number of tax brackets from seven to three — with rates of 10 percent, 25 percent and 35 percent — seems straightforward. But people need to pay attention to what happens to deductions.

The administration’s one-page tax proposal says it will “eliminate targeted tax breaks that mainly benefit the wealthiest taxpayers” while keeping deductions for mortgage interest and charity.

Advisers worry, though, that to pay for the cuts, the plan would cap deductions for high earners or eliminate certain credits, like those for state taxes. That would affect people who live in places like California and New York that have high state taxes.

“We don’t know if that’s still in the plan, but earlier in the year, it was,” said Jeffrey Carbone, managing partner at Cornerstone Wealth, a wealth management firm. “For clients who itemize their returns, that would be a major tax increase.”

If such a system goes into effect, people have few options. One would be to claim more deductions this year — by prepaying state income and property taxes, for example — and delay receiving income until next year when the tax rates are lower.

But as a practical matter, that is difficult: Paying additional state taxes could put someone in the alternative minimum tax, which could limit their deductions, and few people have control over when they get paid.

Estate tax

The 2001 tax package put in motion increased exemptions on estate taxes and decreased tax rates until the tax went away for one year in 2010. But the issue seemed to be settled in 2011 when Congress and President Barack Obama reached an agreement to set the individual exemption at $5 million and have that amount increased each year. They also agreed to a rate of 35 percent, which rose to 40 percent in 2013.

Today, the exemption stands at nearly $11 million for a married couple, which means most people in America have no concerns over ever earning enough to pay the estate tax. Yet Mr. Trump campaigned on a promise to repeal what he called “the death tax.”

Getting rid of it could cause more problems for average taxpayers. When someone dies, their assets are valued on the day of their death — so their heirs inherit them as if they had bought them that day.

If the assets had been sold the day before, the person would have paid a capital-gains tax. This may seem like a big giveaway, but it erases a headache for heirs who would have no idea what securities cost when they were bought decades earlier.

If the estate tax went away, tax advisers wonder if heirs would owe a capital-gains tax when they inherit the assets or when they later sell them, or if some credit would be put in place to help people who receive a modest inheritance. The difference could make receiving an inheritance considerably more expensive, particularly when it comes to modest estates.

Adrienne M. Penta, executive director for the Center for Women & Wealth at Brown Brothers Harriman, said she reminds clients that, unless they are on their death bed, they can count on the estate tax continuing to change.

“The real advice is to stay calm,” Ms. Penta said. “Don’t go making really big changes to your estate plan based on a single page of hopes and dreams around tax reform.”

The other issue is the gift and generation-skipping taxes. They are pegged to the estate tax and keep wealthy people from giving away all of their assets at the end of their life to avoid the estate tax. It’s unclear what might happen to those taxes.

Mr. Simmens, whose focus on the congressional tax-writing committee was on the changes to the estate and related taxes, said the glossing over the thorny details came down to marketing.

“‘Killing the death tax’ sounds different from a public relations perspective than ‘eliminating the estate, gift and generation-skipping taxes,'” he said.

Regardless, he hopes legislators can make any tax changes permanent, and not have them revert to today’s rates in 10 years, as happened with the 2001 plan. “That’s horrible policy,” he said. “The rest is just rates that go up and down, but we see that anyway.”

Source link

Products You May Like

Articles You May Like

Coca-Cola (KO) Q1 2021 earnings beat Street estimates
Advice I got from a mentor at 22 years old that I use
Billionaire Mark Cuban on bitcoin’s top after Coinbase listing
Delta Air Lines (DAL) results Q1 2021
IBM earnings Q1 2021

Leave a Reply

Your email address will not be published. Required fields are marked *