Election Completed: What Tax Changes Could Be Coming?

We saw little in the way of tax legislation this past year. But we did have an election. And with that a lot of uncertainty about what may unfold next year and beyond.

With the election of Donald Trump as president-elect and the retention of the House of Representatives and Senate by the Republican Party, there appears to be a greater possibility that the tax plan put forth by President-elect Trump will have potential for consideration. The following, directly copied from the Trump-Pence website, are the tax change items that should be in play as the Trump administration takes over.

Individual Income Tax

The Trump plan would collapse the current seven tax brackets to three brackets. The rates would be 12% for income under $75,000, 25% for income between $75,000 and $225,000 and 33% for income over $225,000 for married filing joint return. Single individual rates would be half that. Currently the highest tax bracket is 39.6%.

Capital gains rate structure (maximum rate of 20%) with the tax brackets shown above.

The 3.8% Obamacare tax on investment income would be repealed as would the alternative minimum tax.

The Trump plan would increase the standard deduction for joint filers to $30,000, from $12,600 and the standard deduction for single filers would be $15,000. Personal exemptions would be eliminated. Itemized deductions would be capped at $200,000 for married filing joint return and $100,000 for single filers.

Childcare

There would be an above-the-line deduction for child care expenses for children under the age of 13 based on the state average child care expenses. The exclusion would be eliminated for higher income individuals. Low income filers would be eligible for a spending rebate through the Earned Income Tax Credit. Low income filers being defined as those under $62,400 for married filing joint and $31,200 for single filers.

Estate and Gift Tax

The Trump plan would repeal estate and gift taxes. However, capital gains held until death and valued at more than $10 million would be subject to tax. Contributions of appreciated property into a private charity established by a decedent or decedent’s relatives would be disallowed.

Business Tax

The Trump plan would lower the business tax rate from 35% to 15% and eliminate the corporate alternative minimum tax. It would eliminate most corporate tax expenditures except for the research and development credit. Firms engaged in manufacturing in the U.S. could elect to expense capital investment and lose the deductibility of corporate interest expense.

It would provide a deemed repatriation of corporate profits held offshore at a one-time tax rate of 10 percent.

Businesses that pay a portion of an employee’s childcare expenses could exclude those contributions from income. And the annual cap for business tax credit for on-site childcare authorized by Section 205 of the 2001 Tax Act would be increased to $500,000, up from $150,000.


Due Date Changes to Partnership and C Corporation Tax Returns

For clients that will be required to file a 2016 partnership tax return, most usually on a calendar year-end, there has been a change to the due date with the Internal Revenue Service. The prior due date was the fifteenth day of the fourth month following the tax year-end of the partnership. The filing date has now been accelerated by one month to be the fifteenth day of the third month following the tax year-end of the partnership. Therefore, for a calendar-year 2016 partnership, the new filing date will be March 15, 2017, rather than the old filing date of April 15, 2017.

And, while the partnership filing date has been accelerated, the due date for filing C corporations has been moved back one month. The new due date for filing a calendar-year C corporation is now the fifteenth day of the fourth month following the tax year-end, rather than the prior filing date of the fifteenth day of the third month following the tax year-end. Under the new requirements, a calendar-year 2016 C corporation return will be initially due on April 15, 2017. Also, this change only applies to C corporations, the filing date for an S corporation has not changed and is still the fifteenth day of the third month following the tax year-end.


Judge Delays New Salary Level Threshold for Overtime Pay

Earlier this year, the U.S. Department of Labor (DOL) released the Final Rule updating its overtime regulations. The Final Rule more than doubles the current salary level threshold for certain salaried executive, administrative, professional and computer employees to be exempt from overtime pay under the Fair Labor Standards Act. Effective Dec. 1, 2016, the Final Rule increases the salary level threshold for these employees to be exempt from overtime pay from $455 per week ($23,660 annually) to $913 per week ($47,476 annually). The DOL estimates that 4.2 million U.S. workers previously considered exempt from overtime would no longer be exempt on December 1st as a result of the rule. In October, 21 states filed a request for a preliminary injunction challenging the Final Rule with the U.S. District Court for the Eastern District of Texas. Arguments were heard in November, and on Nov. 22, 2016, Judge Amos L. Mazzant III granted the preliminary injunction. This action by Judge Mazzant effectively delays implementation of the Final Rule and allows time for further court hearings. The injunction also provides time for the new administration to review and possibly revise the Final Rule or for the new Congress to enact legislation overriding it. The DOL is considering legal options, such as appealing the ruling.


IRS Proposes Regulations to Prevent Perceived Undervaluation

The Internal Revenue Service issued proposed regulations designed to prevent what the IRS believes is the undervaluation of intra-family transfers of interests in corporations and partnerships for estate, gift and generation-skipping transfer tax purposes. Specifically, the proposed regulations address the treatment of discounts related to certain lapsing rights and restrictions on liquidation when determining the value of transferred intra-family interests, including a new three-year look-back rule.

The law dealing with limiting discounts for certain intra-family transfers of partnerships or LLCs was enacted in 1990. When the law was enacted, the IRS was given authority to develop regulations to provide its position on how to value transfers of intra-family entity interests, particularly when disregarded restrictions are present in the transaction. The proposed regulations, now issued roughly 26 years after the law was enacted, are the result of this authority.

The proposed regulations do not have an immediate effective date. The proposed regulations, when, and in some ways if, made final as written, will apply only to transactions made 30 days after the regulations become final. However, the effective date could be complicated if the transferor of an intra-family entity interest dies after the effective date of the regulations, but within three years of the date of transfer.

Cutting through all the technical wording, the proposed regulations, when finalized, will significantly reduce, or even eliminate, the ability to apply valuation discounts to intra-family transfers of interests.

The IRS held a public hearing on December 1st to receive comments related to the final implementation. Little new information was received at the hearing. While the IRS may push for early finalization, the controversy and complexity of how the new rules appear to go against years of case law development and could slow the finalization process.