Understanding Trump’s Tax Reform

President Trump campaigned on substantial tax reform and his proposal appears to offer significant changes. Whether you agree or disagree with his policies, it’s important to understand what’s being proposed. Here are the more important provisions of the Administration’s plan.

President Trump proposes four simple goals: (1) tax relief for the middle class; (2) simplify the tax code; (3) grow the American economy; and (4) don’t increase the debt and the deficit.

Here’s how he intends to achieve these objectives:

• If you are single and earn less than $25,000 or married and earn less than
$50,000 you will pay zero federal income tax. This removes 50% of the
American population from the tax rolls.

• There are currently seven income tax brackets. The tax brackets will be
reduced to three – 10%, 20% and 25%.

• Corporate income taxes will be substantially reduced to 15%.

• In addition, Trump proposes repealing the federal estate tax in
its entirety.

The tax cuts are purported to be revenue neutral by reducing or eliminating some deductions and loopholes, repatriating corporate cash being currently held overseas and eliminating corporate and special interests loopholes.

Under the current estate tax law an individual may pass up to $5,490,000 free of federal estate tax. That means that a husband and wife may pass up to almost $11,000,000 without paying any estate taxes. Amounts in excess of $11,000,000 are taxed at a rate of 40%. Obviously this impacts very few people, but those that it does affect have historically needed to do significant planning to avoid the estate tax.

Part of President Donald Trump’s tax platform is a repeal of the federal estate tax. For most Americans, with an exemption amount of $5,490,000 the federal estate tax has effectively been repealed for years. Although Republicans control the House, Senate and the White House, the lack of 60 seats in the Senate means that any legislation repealing the federal estate tax is likely to be filibustered. Repeal legislation could be passed with a simple majority as part of the budget reconciliation process, but such legislation is likely to contain a ten year sunset provision. This means that the estate tax would be re-instated after a ten year period. Even if repeal happens, it is likely that the gift tax will remain in place. If the generation skipping tax is repealed, this could offer significant planning opportunities for wealthy families.

At least as to estate tax reform, for 99% of us, none of this matters. Whether repeal happens or not there are still important reasons to establish revocable living trusts- probate avoidance, control of assets, protection of assets from second marriages, asset protection and income tax planning, among other reasons. The estate tax issue is just one piece of the puzzle that should be addressed in establishing a comprehensive estate plan.

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