Should it come to pass, the Trump plan would ease the tax burden of the average taxpayer, says John Neyland, president of JCN Financial & Tax Planning Group in Baton Rouge. Photography by Brian Baiamonte
While tax advisers say the crystal ball is still a bit murky, one thing is clear: President-elect Donald Trump’s tax plan will likely produce some short- and long-term opportunities if taxpayers plan early.
Some key components of the plan—which include a simplification of the tax code from seven to three brackets (12%, 25% and 33%), more than doubling of the standard deduction, capping of itemized deductions, and repeals of the alternative minimum tax and Medicare surtax—will have varying degrees of importance, depending upon a taxpayer’s level of income and deductions.
Louis LoBue, a tax partner at TWRU CPAs and Financial Advisors in Baton Rouge, says the Trump plan, which mirrors the House Republicans’ “Better Way for Tax Reform” plan released in June 2016, could have great potential for lowering one’s overall tax burden. However, it’s a matter of the government “giving with one hand and taking with another.”
“You can have tax rates wherever you want, but what you allow as deductions determines what your taxable income is,” LoBue says. “You really don’t know how it’s going to affect you until they start talking about deductions.” Predicting what will happen in the coming year is a tricky proposition, especially where government policy is concerned. “You never know what’s going to happen until it happens,” he says.
“How all this shakes out, we don’t really know yet but there’s going to be great potential. That’s why you see the stock market going up because businesses are positive. They figure the company is going to make more money, be more profitable and give more returns to the shareholders.”
—Louis LoBue, tax partner, TWRU CPAs and Financial Advisors
Should it come to pass, the Trump plan would ease the tax burden of the average taxpayer, says John Neyland, president of JCN Financial & Tax Planning Group in Baton Rouge. The idea is that lower taxes would stimulate the economy and thereby put more money in government coffers—a spinoff of 1980s “Reaganomics.”
However, what a taxpayer can do now to maximize benefits depends upon if and when the tax changes are implemented. If key components of the plan aren’t implemented until 2018, accelerating deductions in 2017 should be a top priority for those individuals with traditionally high levels of deductions (in excess of $100,000). That way, they capitalize on those deductions before the cap is put into place.
“By utilizing a donor-advised fund you could potentially deduct five years’ worth of charitable contributions today,” Neyland says. “By placing the money into the fund, you could dictate when the money actually goes to the charity over time, but deduct it all in the current year.” In the meantime, the money in the fund is invested, thereby appreciating in value.
“What we’re telling people now is to take advantage of deductions that they might not have taken in the past,” he adds. “For example, there are HSA (health savings account) contributions that are tax deductible. Also, if there are any losses on stocks, you’ll want to go ahead and take those if you can and offset them with gains.”
David J. Bourg, a CPA at accounting firm Hannis T. Bourgeois in New Orleans, says investors would also benefit from the Trump proposal, primarily through a proposed repeal of the investment income tax associated with the Affordable Care Act and the extension of the preferential tax rate to dividend interest.
“Someone making interest on a CD or bond is going to get the preferential tax rate (lower than the income tax rate), which was not the case before,” he says. “The theory is that you encourage investment and grow the economy that way.”
Bourg’s most recent concern has been the proposed repeal of the estate tax (assessed on the value of assets at death) as part of the Trump plan, which would significantly impact “when and how” an individual transfers assets within a family.
At face value, it looks like a “win-win” because the president-elect’s proposal calls for taxing property at death at the much lower capital gains rate, in lieu of the estate tax. Therefore, the tax is only on the gain, or the value of the property less the cost, Bourg explains.
However, he says there is concern that even though the estate tax might be repealed, it could be reinstated in the future. Therefore, any move to delay the transfer of assets following a tax repeal could backfire. “The estate tax has been repealed four times before and it has come back every time. That’s a very real concern,” he says. “We’re advising investors to hold off making any decisions for now.”
At the corporate level, tax advisers say the benefits from a lessened tax burden should give a much-needed boost to the U.S. economy. “How all this shakes out, we don’t really know yet but there’s going to be great potential,” LoBue says. “That’s why you see the stock market going up because businesses are positive. They figure the company is going to make more money, be more profitable and give more returns to the shareholders.”
Neyland feels the benefits of lower corporate taxes is obvious. “People who give businesses a bad rap should remember that these same businesses provide jobs. Where do you think the taxes are coming from?” he says. “They pass the taxes on to the individuals, the buyers of the products, through higher prices. It’s not like it’s a free ride.”
Tax advisers urge individuals to seek the advice of a local professional to keep abreast of any tax changes coming this year, because the impacts will vary depending upon an individual’s situation. JCN leads a class each month to educate clients on current tax law, and Neyland expects several sessions will be necessary should the Trump plan become reality.
“I started doing that 10 years ago because I realized that if you’re my client, and you don’t know what we’re doing, how can I really help you?” says Neyland, who gives financial advice primarily to individuals and high net worth families, and gets frequent tax updates and guidance from New York tax and IRA guru Ed Slott.
TWRU’s LoBue urges taxpayers to get advice from both a CPA and financial planner to maximize benefits from the Trump plan. “CPAs are good at taxes, and financial planners are good at planning your future and retirement,” he says. “Then you have firms, such as ours, that provide both.”
To stay on top of current tax law, Bourg says HTB spends $100,000 a year on research and tax services, including preparation software and library resources. “There are also government sources and nonprofit sources that disseminate current information and expert opinions,” he adds.
All of the tax advisers polled expect new tax proposals to be introduced by the House of Representatives in early 2017, but any changes are not expected to be signed into law until later in the year.