Excerpt from LIBN Featuring Michael Greenwald, MPPM, CPA
Benjamin Franklin is revered for his sayings including in “this world nothing can be said to be certain, except death and taxes.”
Although no-one is sure exactly what Donald Trump, House Speaker Paul Ryan and a Republican-controlled Congress will do, most expect dramatic change to the tax code. Yes, they will exist, but no-one’s sure what they will look like over the next few years.
Even the estate tax or death tax may vanish as taxes (and deductions) find themselves targeted in what could be the biggest tax revamp since Ronald Reagan’s 1986 reinvention of the tax code.
Donald Trump is calling for three instead of seven brackets, a top individual rate of 33 percent down from 39.6 percent and corporate rate of 15 percent down from 35 percent.
While some people’s tax tab may rise (as the lowest bracket lifts to 12 percent from 10 percent), many companies and individuals could see rates tumble faster than a penny dropped from the top of Trump Tower.
Advisors are telling people to delay deals that generate income until the author of “The Art of the Deal” becomes president.
“We’re telling clients, to the extent that you’re doing a transaction or have income coming in between now and the end of the year, if you can postpone it until 2017, you’re probably better off doing it,” said Michael Greenwald, partner and corporate and business tax practice leader at Friedman, based in Manhattan with a Long island office in Uniondale. “We’ve been telling people they should postpone deals if they can.”
Financial advisors are telling taxpayers to take deductions today before they disappear or lose value – due to lower tax rates. And everyone’s trying to figure out how taxes will be transformed.
Axing the tax
Trump, who said that he’s best suited to accomplish reform because he’s used loopholes, may be an unexpected tax policy architect. But Republican administrations have made major changes to tax codes before. Ronald Reagan reinvented taxes with Reaganomics and George W. Bush cut capital gains taxes and treated qualified dividends as capital gains.
It’s not clear what “Trumpanomics” would look like or how it would fit with the House of Representatives’ “Better Way” plan. And Congress has to balance the budget, which means finding ways to pay for tax cuts – considered the same as spending bills.
“Trump’s plans have been fluid,” Greenwald said. “He talked about a number of different plans. It’s been hard to tell exactly what he plans to do.”
On the most basic level, Trumpanomics could look a little like Reaganomics, proving a windfall to the wealthy and corporations.
Individual rates would be 33 percent, 25 percent and 12 percent, higher than the current nadir of 10 percent.
Trump would eliminate the 3.8 percent surtax on net investment income and the payroll surtax on wages over $200,000. The head of household tax status likely would be eliminated and the 28 percent alternative minimum tax also could go away.
“There’s the tension,” Greenwald said. ”Business tax reform is easier than individual tax reform. There’s going to be fighting over what gets left in on individual tax reform.”
Many deductions could disappear or dwindle including charitable, medical and home mortgage, as well as earned income and child care credits.
“Each of those has a separate constituency,” Greenwald said. “It’s a lot more difficult to envision comprehensive individual tax reform happening quickly. I think there’s some desire to have business tax reform happen quickly. Can you do those two things separately”?
Trump campaigned on killing the estate tax, which currently kicks in at around $11 million for married couples.
If killing the estate tax seems like a huge decision, this wouldn’t be the first time a stake was driven into the heart of this tax.
“It lapsed and wasn’t renewed until after president Obama came in,” Greenwald said of the 2010 one-year “repeal.” “It was part of that grand bargain.”
Before anyone uncorks champagne, it may be wise to remember Franklin’s words: Taxes may have some certainty. Trump and Paul Ryan both say they want to close loopholes – which they often define as deductions.
“Today the tax code is littered with special interest deductions and credits that are designed to encourage particular business activity,” Ryan said, adding he wants to “eliminate special interest deductions and credits, in favor of providing lower tax rates for all businesses and eliminating taxes on business investments.”
Trump has discussed limiting itemized deductions to $200,000, which could have a huge impact on affluent taxpayers.
The payroll tax deduction could go away along with state tax deductions, a major change in New York and California with high state taxes.
Trump also is looking at moving away from depreciation and allowing bigger upfront deductions by expensing capital expenditures immediately, a huge boon to business.
Going, going, gone…
Trump has talked about taxing corporations at 15 percent, while the House of Representatives has discussed 25 percent, both well below current rates.
Business people, hedge fund managers, real estate developers and others who don’t need cash could leave money in their business – and benefit from that lower business rate.
“It would be very positive for hedge funds, private equity, real estate,” Greenwald said. “It’s also positive for tech ventures.”
MICHAEL GREENWALD: Some clients are delaying deals, anticipating that tax rates on the income will drop.
If the taxman giveth back, he also might taketh under Trump. Transactions known as 1031 exchanges, in which no tax is paid on the sale of a building used to buy another building, could be limited or eliminated.
“There’s a reason,” Greenwald said. “The way things are set up now, every time Congress passes a tax cut, it must find a way to pay for it. Any spending bill has to be revenue neutral. And a tax bill is considered a spending bill.”
The transportation bill in 2015, for instance, called for adding money to a transportation trust fund. To pay for that, Congress changed rules on how partnership gets audited, generating revenue.
Hedge fund and private equity fund managers could be hurt if carried interest is repealed, as both major political parties have proposed.
These managers typically get a percent of compensation as ordinary income and a percent as capital gains, taxed at a different rate. All compensation would be taxed as ordinary income.
While Trump is talking about revamping taxes, he’s also talking about reducing regulation, proposing that for every one new regulation added, two be removed.
A Republican Congress could eliminate the Consumer Financial Services Protection Bureau that regulates debt collection, foreclosure and some other financial processes.
She said, however, that it’s not clear what changes will sail through Congress, especially in the face of possible filibusters.
The devil may be in the details, to quote a phrase that Benjamin Franklin at least could have conceived, but the big picture is likely to mean lower taxes for many.
One thing, though, is certain: Donald Trump’s own taxes are likely to attract attention. After Richard Nixon took a big deduction for donating his papers, Congress passed a law, requiring the president and vice president to be audited annually.
“I assume his audit is going to continue,” Greenwald said. “By law, their tax returns are audited. The results are not released.”
The home front
While there has been talk about sticks and punishment for companies that never bring profits home, Donald Trump has clearly said he favors carrots.
While Trump has talked about various ways of getting revenue, encouraging businesses to repatriate profits is among the biggest. Estimates range from $2 trillion to $3 trillion in profits hoarded abroad, including more than $100 billion from Apple with large amounts held by Google, GE and even Starbucks.
Trump has been talking about a 10 percent tax on repatriated profits, or bringing offshore earnings back to the United States. That could lead to hundreds of billions of dollars in money brought back home, if at far lower rates than today.
This isn’t the first time that the federal government has sought to open the window to encourage companies to bring profits back home from around the world. George W. Bush in 2004 had a “repatriation tax holiday,” letting companies bring money home at 5 percent.
“The problem is there’s a debate between Congress and the Trump team on what that money would be used for,” said Michael Greenwald, partner and corporate and business tax practice leader at Friedman, with Long island offices in Uniondale. “Trump wants to use some or all for infrastructure, airports, rail, and bridges.”
Two trillion dollars taxed at 10 percent would yield $200 billion, providing a big fund for infrastructure or lower taxes.
Paul Ryan favors using the money to fund tax credits, while Trump also talked about using tax credits instead to funding infrastructure.
“Congress doesn’t want to borrow and wants to use the taxes on repatriated dollars as part of the payback for reduced tax rates. There’s this tension between Congress and Trump,” Greenwald said. “Congress is disinclined to borrow and spend money on public works projects.”