How the Tax Reform May Impact Your Future and What to Do About It

29 Oct How the Tax Reform May Impact Your Future and What to Do About It

How a Trump presidency will affect your financial future?

Consider this, Trump as grand plans to reform taxes, health care and roll back financial measures such as Dodd-Frank & the recent Department of Labor Fiduciary Rule. Each one of these have long-term implications on our retirement and livelihood-some for the better; others it is hard to say. Pay attention to your individual State tax proposals. Washington State, for example, has a Capital Gains Tax proposal that would hurt retirees in a big way; Seattle has an Income Tax proposal as they seek to test the waters. Trump made many promises during his campaign; below are a few points to shed light on the potential Tax future.

Take a look and please comment on any tax reform proposals that you think may become a reality in the next 4 years.

Income Taxes

• Consolidate 7 tax brackets into 4 brackets … 0%, 12%, 25%, 33%
• Top marginal rate of 33% would be for married > $300,000 taxable income (single > $150,000)
• Relief for families with child and dependent care expenses
• Double the standard deduction
• Start for tax year 1/1/2018 or retroactive to 1/1/2017?

Capital Gains and Dividends

• Tax Rates of 0%, 15%, 20%
• 0% for married taxable income < $100,000 ($50,000 single)
• 15% for married taxable income $100,000 to $300,000 ($50,000 to $150,000 single)
• 20% for married taxable income > $300,000 (> $150,000 single)

Trump Proposal – Repeal Affordable Care Act including the Add-On Taxes

• Repeal 3.8% surtax on passive unearned income of high earners
• Repeal .9% FICA surtax on earned income of high earners
• Top income tax rate under Trump proposal – 33%
• 33% + State Income Tax = 37% – 40% combined marginal rate
• Regular FICA taxes on 2017 earned income
• 6.20% OASDI up to $127,200 + 1.45% HI on unlimited income

Corporate Taxes

• Cuts the corporate tax rate (C Corps- Publicly Traded and Privately Owned) from a top rate of 35% to a flat rate of 15%. The current U.S. corporate rates have not been changed since the early 1990s and are now among the highest in the world.
• Tax pass-through business entities (S Corps and LLCs) at a personal rate of only 15% on K-1 profit. Possibly a two-tier tax on retained/distributed profits.
• Current law taxes K-1 pass-through profit at personal rate as high as 39.6%
• Enact a one-time tax on oversees money, deemed repatriation tax of 10% on all foreign profits currently deferred by U.S. companies.
• Territorial tax system to level the playing field for American companies
• Eliminate tax breaks for special interests

Estate Taxes

• Current law provides for a permanent estate tax rate of 40% and a permanent $5 million estate tax exemption for individuals ($10 million married) (Indexed to $5.49 M/ $10.98 M in 2017)

In a recent article by Susan Rupe of InsuranceNewsNet, she writes there is an 80% chance of estate tax repeal under Trump and a GOP Congress.

Trumps Proposal for Estate Taxes = Totally eliminate federal estate taxes!

• “Stepped Up” cost basis or “Carryover” cost basis on capital assets for purposes of capital gains taxation on future sale of asset. $10 million capital gains exemption and 20% capital gains tax upon sale of assets?
• Even if repealed, estate taxes can be re-enacted into law by a future Congress and President. U.S. estate taxes since 1916 except for 2010.

Estate Planning

• Will marital- credit shelter (A/B) and portability type of planning even be relevant anymore if federal estate taxes are eliminated?
• Simple revocable living trusts that become irrevocable at death? No need to split into A/B Trust portions at first death if there are no estate taxes?
• These Trump tax proposals could be passed into law in 2017 under the “budget reconciliation” process where only 50% of the Senate is needed to pass bills.
• The 60% Senate filibuster rule to block legislation does not apply to laws passed under budget reconciliation.

Irrevocable Life Insurance Trusts

• Focus on after-tax IRR on death benefit at life expectancy. Compare to current after-tax yields on other fixed type of financial products, like CDs, corporate bonds or U.S. government securities.
• Will ILITs to offset federal estate taxes even be relevant anymore if federal estate taxes are eliminated under the Trump proposal?
• What will happen to existing life insurance owned by irrevocable life insurance trusts (ILLITs)?
• Surrenders?
• Exchanges with no more premiums due?
• Reduced paid up?
• Keep paying premiums on ILLIT policies due to very competitive insurance rate of return (IRR) at life expectancy as part of an allocated financial asset portfolio?
• Keep ILIT insurance inforce if estate taxes may be re-enacted into law by a future Congress and future President?
• Keep ILIT insurance to offset future capital gains tax when heirs sell assets?

DOL Fiduciary Rule

You may see articles on the internet about whether or not the DOL Rule will be retracted and voided under the Trump administration. Many think that it faces certain elimination. Check out this article to read more. The impacts of the DOL Rule are numerous and in my opinion the good the rule might do the Financial Service Industry is not enough to counter-balanced the potential costs consumers will suffer.

How to Protect Ourselves

Whether we are just starting our career or business or if we are on the cusp of the new paradigm of retirement, there are ways to protect yourselves. Creating a plan with a Retirement Specialist who shares your goals of generating lifetime income is critical. Protecting your assets from Long Term Care, market risk and taxes are m increased and with the Feds low interest rates we can no longer pretend retirement is business as usual. An article from the Wall Street Journal describes the risk of not having your retirement set up correctly. Read it HERE.