While we generally have tax legislation every year or so, it's rarely transformational to the system. The 1969 and 1986 Tax Reform Acts were two blockbusters, changing rates significantly and influencing business structures. It looks as if 2017 could bring another seismic rewrite of our federal tax system.
THE CAMPAIGN PROPOSALS
After the Inauguration, Republicans will control the presidency, House and Senate. The Trump and House GOP pre-election tax proposals aligned on many important points. The present seven bracket system, topping out at 39.6%, would change to three brackets: 12%, 25% and 33%. Itemized deductions would be limited, and personal exemptions eliminated. The standard deduction, in lieu of itemizing, would rise significantly ($30,000 joint/$15,000 single in Trump's proposal).
The long-outdated Alternative Minimum Tax would be repealed. The AMT came to us in 1969 to address a handful of wealthy individuals who paid no tax. Since then we've added numerous stopgaps such as the passive loss restrictions and the at-risk rules.
With respect to capital gains, the House proposal would go back to the 50% gain exclusion model. The effect would be to lower top rates modestly (e.g., the top 20% rate would drop to 16.5%), while the low end 0% rate would rise to 6%. Also, the 3.8% net investment income tax, applying to most capital gains, would be repealed.
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The estate tax is targeted for repeal by both proposals, although Trump's would impose a post-death 20% capital gain tax on appreciated assets on estates that exceed $10 million. However, this tax would not apply to farms and small businesses. For other large estates, the proposal would drop the estate rate from its present 40% to 20% and nearly double the per estate exemption.
The Republicans lack a filibuster-proof majority in the Senate. They could enact tax legislation under a 10-year temporary budget process, but to enact permanent changes will require getting some Senate Democrats on board. That has a reasonable possibility, given that 25 Senate Democrats are up for election in 2018 and roughly 10 are from states that went solidly Republican in recent elections.
Negotiating the final legislation outcome will likely be a long process, lasting into mid-2017 or later. This could be a year to extend your 2016 tax filing and keep your options open. For those using the special March 1 farm filing date, it will be necessary to remit a 2/3 tax estimate by Jan. 15 and the balance of tax with the extension on April 15. This allows a delayed filing until Oct. 15. This should be sufficient to determine if more aggressive depreciation decisions should be made for 2016, in light of possible lower rates in 2017 and after. And certainly any pending capital gain transactions should be postponed, given that lower rates are possible.
Editor's Note: Andy Biebl is a CPA and tax principal with the firm of CliftonLarsonAllen LLP in Minneapolis with more than 40 years' experience in ag taxation, including decades as a trainer for the American Institute of CPAs and other technical seminars. To pose questions for future tax columns, e-mail AskAndy@dtn.com.
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