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Tax Rates. How to protect your Assets in a Trump Administration.

tax ratesTax rates and asset protection in a Trump Administration.

Let’s talk tax rates. Now that Donald Trump is transitioning to the Presidency and we have a republican controlled House and Senate we can anticipate some “Reagan like” tax law changes. [1] When Reagan came into office, tax rates on unearned income were at 70% and the prime rate was at an all-time high of 21.5% and averaged 12.65% over the decade of the 80’s. [2] The Reagan administration lowered the tax rate on unearned income to individual rates on earned income and long-term capital gains were taxed at a reduced rate of 40%. Now with a Trump administration we might see tax rates as low as 15% on interest and dividends.

This article will discuss the “clues” that were revealed during the campaign [3] as to what changes we can expect and how to protect our assets going forward.

What changes, what tax rates can we expect?

  1. Repeal of the Obamacare surtax – The Patient Protection and Affordable Care Act of 2010 surcharge is equal to 3.8% of a taxpayers “net investment income” from dividends, rents and capital gains. [4]
  2. Lower corporate income tax rates. – Currently we have the highest corporate tax rate in the world, at 38.82 %, The next highest is France at 34.43% and the lowest is the United Kingdom at 20%. Expect Trump to push for a corporate tax as low as 15%. Businesses can also expect to benefit from an election that allows fully expensing plant and equipment costs by waiving the deduction to write off interest on business loans.
  3. Lower individual tax rates – Tax brackets will be reduced from 7 to 3 with tax rates at 12%, 25% or 33%, down from 39.6%.
  4. Taxes on imports – You can expect higher consumer prices through tariffs on imported goods which leads to inflation which in turn leads to higher interest rates.
  5. Child Care Credits – even for the wealthy. These credits are a central part of his tax reduction plan.

8 Year-End TAX Planning Tips. What are the key planning tips for asset protection?

  1. Consider deferring sales of assets such as income producing real estate as these will become more valuable if the surtax is repealed and your net proceeds after tax will be higher if the sale is deferred to 2017.
  2. May make sense to use C corporations to lower your overall tax rate. With corporate tax rates at 15% and your individual tax rates as high as 33%, the C Corporation can be used to shelter your income from income taxes while you grow equity in your C corporation.
  3. Increased job creation through government funded infrastructure type public improvements – see article by John Paul Turner below on The Power of Eminent Domain and the Government’s Right to Take Your Property.
  4. Protect investment accounts by diversifying into inflationary hedges and investments that do well as interest rates rise while avoiding health care and related industry investments that presents obvious risks due to the uncertainty in the industry.
  5. Refinance floating rate loans to fixed rates. Lock in these historic low interest rates!
  6. Defer income into 2017 and accelerate expenses into 2016. Income will be taxed at lower rates and expenses taken in 2016 will be more valuable.
  7. Defer gains on sales and even consider a 1031 exchange on sales of real estate assets. Even the sale of a conservation easement qualifies as a sale of a “real property interest” that would allow the net proceeds to be reinvested in income producing real estate assets with the rental income being spared of the surtax charge.
  8. Defer major capital equipment purchase to 2017 to take advantage of the write-offs. Pay cash if possible to avoid the loss of the business interest deduction.

General Recommendations – We can expect change and with change comes uncertainty, which makes investors nervous and more cautious, so it is a good time to re-evaluate your investment portfolio to make sure you have good diversification, including assets and liabilities that grow in value as interest rates increase, such as adjustable rate assets (adjustable rate bonds or annuities) and fixed rate liabilities (on your home loan, for example). Time to lock in these historically low interest rates!

1. I was 30 years old when Reagan took over the oval office. The prospect of change was exciting for young professionals at the time.
2.  The Prime Rate is the rate banks charge their best customers on loans. See http://www.fedprimerate.com/wall_street_journal_prime_rate_history.htm.
3. You can also visit the Donald J. Trump website at http://donaldtrumppolicies.com/
4. Or, alternatively, taxable income minus a threshold amount of $250,000 for married couples filing jointly, $125,000 for single filers, and $200,000 for all others.

Dysfunction in Washington? So what!

So what if there is dysfunction in Washington – Good Times Continue. You can still complete family gifting with favorable exemptions and THERE IS STILL TIME for high income earners to cash in. Yes, tax rates are slightly higher, but you can offset that by taking advantage of the generous deductions that are still allowed for purchases completed by year end. See our tax tip below for more details!

So we all now know, Congress did not disappoint us last December. It did act. We did not go over the “fiscal cliff”. On January 2, 2013 Pres. Obama signed the American Taxpayer Relief Act of 2012, (“ATRA”) which had been approved by both houses of Congress one day earlier. ATRA is notable for averting the tax side of the so-called “fiscal cliff” by extending or making permanent favorable tax legislation passed in 2001, 2003, 2009 and 2010.
Indeed ATRA is perhaps the most significant tax legislation in nearly 12 years. Its primary focus was preserving income tax breaks only for those in the lower tax brackets. So, for married couples earning more than $450,000 annually, the marginal tax rate rose from 35% to 39.6% and the capital gains rates increased from 15% to 23.8% including the 3.8% Obama surtax, but there is one last loophole left. See below:

TAX TIP – BUY TANGIBLE PERSONAL PROPERTY FOR BUSINESS USE!
You only have several weeks to take advantage of the ATRA’s one year extension of the higher expensing limits and 50% bonus depreciation by buying depreciable tangible personal property for use in your trade or business. For example, on an $800,000 purchase, you would get a $500,000 IRS Section 179 deduction and another $180,000 in depreciation deductions. This very generous deduction goes away on December 31st.

So buy that bulldozer, copier, truck, van, or whatever personal property assets your business might need and do it before year end. You can even finance it. Preserve your cash flow and get a huge tax reduction in April.

What if Congress Does Nothing in 2012?

Two years ago, in 2010, there was a quirk in the Estate Tax laws. For one year, there was no estate tax because Congress did nothing that year. It was the first time there was no estate tax since the start of World War I in 1916. We were (in jest, to make a point) advising high net worth clients to, “hurry up and die”. In fact, George Steinbrenner and Glen Bell Jr. (founder of Taco Bell) died in 2010 costing the federal government billions in estate taxes when it could little afford it while waging two wars.

Now, two years later, with the Bush tax cuts looming to go away unless Congress acts, and with little or no change in the political makeup of Congress, the possibility that Congress does nothing between now and the end of the year is a strong reality. Will this country fall of the “fiscal cliff”? What will that mean to the average taxpayer and what can we do to plan for this possibility?

If Congress does nothing:

  • Ordinary income tax rates will increase across the board from 10%, 15%, 25%, 28%, 33%, and 35% TO 15%, 28%, 31%, 36% with a top rate of 39.6%
  • Capital Gains Rates will increase from 15%[1]TO 20% for taxpayers in the 28% bracket and above [2]and 10% for everyone else.
  • Dividends will be taxed as ordinary income instead of net capital gains
  • The Medicare Surtax of Obama Care will start at 3.8% of net investment income [3]
  • Itemized deductions will be limited and high income taxpayers could lose up to 85% of their deductions.
  • The Estate Tax exemption equivalency amount and gift tax exemption will go down from $5.12 million TO $1 million with rates moving up from a flat 35%, progressively, up to a maximum of 55%.

So what is our advice for high net worth clients? 

  • MAKE THAT “BIG GIFT” BEFORE YEAR END
  • ACCELERATE INCOME RECOGNITION INTO 2012
  • ACCELERATE GAINS FROM SALES OF CAPITAL ASSETS INTO 2012
  • PUT OFF DEDUCTIONS INTO 2013 EXCEPT FOR BONUS DEPRECIATION

Even if Congress acts, you can anticipate that there will be heightened focus on the Estate Tax as a way to increase revenues without “raising taxes”. Congress can just do nothing and allow the exemption equivalency amount to revert back to $1 million. That would be consistent with the $60,000 exemption amount in 1957 based on the Consumer Price index [4] which has increased at a factor of 8 times since 1957. At $1 million, the exemption will have increased by a factor of 16.67 times, which even the current Congress should be able to justify.

If Congress does act by year end, you can expect a combination of some tax increases and revenue cuts, but given the election results, Obama will not have to go as far to the right as he did during his first term in attempting to reach a compromise.  The “fiscal cliff” battle field has changed considerably which might help us see some positive results for this country before year-end, in any event, we recommend tax planning that recognizes that tax increases are inevitable, even if Congress does nothing.

 

[1]  for taxpayers in the 25% brackets and above
[2]  18% tax rate if the capital asset is held for more than 5 yrs.
[3]  The Patient Protection and Affordable Care Act of 2010 surcharge is equal to 3.8% of a taxpayers “net investment income” from dividends, rents and capital gains, or, alternatively, taxable income minus a threshold amount of $250,000 for married couples filing jointly, $125,000 for single filers, and $200,000 for all others.
[4]  All Urban Consumers (CPIU) U. S. City Average (1982-84 = 100)

Foreclosure Fairness on the Radio

Richard Seward was a guest on the popular Dr. Pat radio show in Seattle. Hear what he had to say about the Foreclosure Fairness Act. The full interview also includes Rick’s son Adam, but this audio has been shortened to focus mostly on Rick’s discussion of how the Foreclosure Fairness Act works for homeowners in distress.
[powerpress]
Subscribe to Richard D. Sewards Podcasts on iTunes.
To listen to the full audio including more of the discussion with Adam go to the Dr. Pat show and search for Richard Seward or Adam Seward. This broadcast is dated 04/28/11 11:30AM