Certainly Uncertain: A Look at the Potential Post-Election Impact on Taxes– November 09, 2016 by Mike Kolk

The presidential election cycle that has finally come to an end has been unique in many respects. Both candidates were unpopular according to the polls, and utterly loathed by the supporters of the other. A third camp despised them both and feared this was the beginning of the collapse grounded in apocalyptic paranoia. Clearly jamias vu — something never seen before. A whole new experience. At least that’s what today's sound-bite driven media would like us to believe.
Not so fast. While the jaw-dropping race left us with an adult-themed election season that unfortunately may have set the bar for new lows in future U.S. elections, we have landed with a Republican president and a Republican Congress. Sounds pretty familiar, even sort of recent, doesn’t it? Harken back to the days of the 108th and 109th Congresses, a.k.a. the middle of President George W. Bush’s terms (2003-2006). So it’s actually all about déjà vu.
Like Bush during his presidency, President-elect Trump lays out an aggressive tax plan. Primarily, he proposes to:

  • Reduce taxes on higher earners, especially those with AGI over $700,000, by reducing seven tax brackets to three,

  • Align capital gains and qualified dividend rates such that the top ordinary and capital gain rates would top out at 33% and 20%, respectively,

  • Repeal the Net Investment Income tax,

  • Eliminate estate taxes, yet the first $10 million of basis step up would continue,

  • Greatly enhance the ability for businesses to expense asset purchases but forego any deduction for interest if the purchases were financed, and

  • Reduce business tax rates to 15%, which would include income taxed to S Corporation and LLC owners.

There are some tradeoffs, but they are few and far between. Given the intention of these proposals, good tax planning advice would likely be to defer as much income as possible now so it will be taxed at likely lower rates later.
Tax laws, however, do not originate in the White House, but generally in the House. Much like Bush, who focused on tax reform and had a good working relationship with Congress, Trump will attempt to get his proposals enacted quickly. A key to this of course will be how his relationship with Congress will evolve in light of the rocky relationships created over the summer. Assuming self-proclaimed tax wonk Paul Ryan retains his position as the Speaker of the House, and hoping that Congressional fences can be mended, tax proposals are likely to get much attention.
Recall that Bush signed the 2001 tax law (EGTRRA) and 2003 tax law (JGTRRA) that lowered all tax brackets for ordinary and capital gains taxes, enhanced retirement savings and created a sunset for the estate tax. Tax planning shifted as the rules moved and strategies such as IC-DISCs, for example, now made sense as a pure tax rate arbitrage play for companies with meaningful foreign sales. A key hurdle for Bush was the need to stay within the PAYGO budget rules and not add to the federal debt. Bush’s tax plan was crafted to fit within the rules but also deliver on campaign promises. Sound familiar?  Also recall that in 2004 there was a tax holiday, which allowed foreign assets to be repatriated at a mere 5.25% tax rate. A similar initiative under Trump could help bring back a portion of the estimated $2 to $2.5 trillion outside the U.S. A tax inflow of even $100 billion or so would help cover some of the costs of implementing proposed tax cuts.
Now that the election is behind us, the political ads aren't airing and the world is trying to determine just what is in store, remember that this uncertainty is certain to bring change. Navigating tax planning closely with your advisors will be imperative.
Read our related article on the election’s impact to the financial markets.
Cohen & Company is not rendering legal, accounting or other professional advice. Any action taken based on information in this blog should be taken only after a detailed review of the specific facts and circumstances.