Death and taxes, as the adage goes, are the most certain events in life.
With President Donald Trump now in office, what’s probable, according to tax planners in New York, is that there will be reform in taxes—from income and capital gains to estate and corporate—and taxpayers should prepare for several changes.
Uncertainty generated by the political landscape under a Republican leadership going forward and Trump’s unpredictability are hampering specific tax planning, said William H. Jones, a member of the Taxation of Individuals Committee at the NYSSCPA. While Jones had his predictions, such as the long-term capital gains tax falling from its high of 20 percent for the wealthiest taxpayers, he said that, right now, it’s too soon to know for certain how exactly someone should be doing his or her tax planning.
“I think, long term, you’ll see the top rate probably go down. [The] capital gains rate maybe will go back to 15 [percent]. Who knows? But I don’t think it’s anything you’d actually want to act on until you see it,” Jones said.
Michael J. Gargiulo, chair of the C Corporations Committee, made a similar point when it came to business tax planning. While he said it’s too early to fully understand what could pass in 2017, he mentioned that Trump talked about lowering the corporate tax rate to 15 percent from 35 percent. In this case, he said that he would have recommended that clients “really accelerate deductions” in 2016, because the tax rates will most likely change in 2017.
A change to 15 percent would reduce the corporate tax rate to a level not seen since 1937, when Franklin D. Roosevelt was at the beginning of his presidency. Yet today’s 35 percent rate for the highest earners—set by Congress during the Clinton administration—is still lower than the peak 53 percent rate in 1942, when Roosevelt’s New Deal was in full swing.
Edward L. Arcara, chair of the Tax Division Oversight Committee, cautioned against taking anything Trump said during the campaign too literally. He noted that the government is more than the president, and so people shouldn’t necessarily accept what Trump says as the final outcome because there has to be a process—which includes legislative action—for reform to take place and for new tax rates to become part of law.
“It’s interesting because everyone thinks whatever comes out of the president’s mouth is law. That’s what I talk about during tax season. ‘Well, aren’t they gonna abolish estate taxes?’ Well, no, that’s what he said he wanted. They always think just because the president said it, it’s law. They don’t realize there’s a process it has to go through,” he explained.
But if taxes are lowered, even if it’s by less than what Trump promised, another area of impact could be Roth IRAs, according to Barry S. Kleiman, who is also a member of the Taxation of Individuals Committee. In a Roth IRA, contributions are post-tax, and qualified distributions are not taxable. Compared to a traditional IRA, contributions are not deductible. Kleiman noted, though, that traditional IRA contributions will be less beneficial if taxes are lower, and that increases the appeal of the Roth IRA.
“It just makes the Roth IRA more attractive than it ever has been,” he said.
Tax cut proposals are nothing new to presidential campaigns, especially with regard to personal income tax. Nevertheless, it remains to be seen whether Trump will be able to get the reductions he seeks. Previous reforms—such as the Revenue Act of 1964, which lowered taxes from 91 percent to 70 percent for the highest bracket—were the result of not just presidential will but congressional maneuverings as well.
Jeffrey F. Allen, a member of the C Corporations Committee, noted that Trump will likely have to make compromises on his agenda, not just with Democrats but also with his fellow Republicans, who control both the Senate and House of Representatives. While Trump called for large tax cuts during his campaign, he also called for expensive spending projects, such as those on infrastructure, to boost the economy.
He noted that the plan released by House Speaker Paul Ryan this past summer strove for revenue neutrality, which, Allen said, may be difficult to achieve. Tax cuts mean less government revenue, which means less for the roads, bridges and airports that Trump has pledged to build, as well as for the military buildup he’s also pitching. Financing these projects may mean fiscal stimulus measures that could balloon the budget deficit and national debt. This could be a tough sell to the speaker, according to Allen, because Ryan is ideologically opposed to most government spending, which sets him up for potential conflict with Trump’s supporters.
While Allen believes that big tax changes are coming—something akin to the 1986 reforms that took place under President Ronald Reagan—Allen also said that it’s too soon to anticipate the specifics of tax planning. Gargiulo raised a similar point—he also suggested the possibility of a 1986-style tax reform, especially considering that both legislative and executive branches are con trolled by the Republican Party now, but little can be known about what those changes will be, except that they will be significant.
“So, you’d think there would be some major stuff coming out of this, probably in 2017, but what exactly it will be like, your guess is as good as mine,” Gargiulo said.
Jones was skeptical that anything too dramatic will come from a Trump administration as far as taxes go. He said that some of Trump’s proposed projects would be very expensive, which will be a tough sell to fellow members of the GOP.
“This is the same Republican House that doesn’t want to increase the debt, that was opposing every increase in the debt ceiling—so how do they reconcile that? And with a [narrow] lead in the Senate, basically, you get two Republicans who say, ‘This is too much money,’ and the whole thing is up in smoke,” Jones said. “He doesn’t have the votes to do anything drastic.”
Despite so many unknowns, Arcara said that there is one certainty: Tax preparers will be busy.
“Usually, when they tinker with the IRS code—it’s always something—that always brings a tick up in business because people want to make sure they’re taking full advantage of the changes that are out there,” he explained.