Get Ready for 2017 Tax Changes

Question: Now that we have a new President being sworn in to office next week, and a Republican House and Senate, what kind of changes to the tax laws can we expect? 

Answer:  Lots of taxpayers are asking this question.  I don’t usually speculate about tax law changes, butwe know for sure that the President-elect and new Congress are on the same page this year, meaning it is very likely their proposals will be drafted into law.  So here is what to watch for:

Business Income Tax: We’ve been hearing for years about the high U.S. Corporate tax rate.  It’s been frustrating to watch successfulU.S. companies relocate their corporate headquarters oversees to Bermuda, the Cayman Islands, Ireland, and other countries to lower their tax bill.  These “corporate inversions” have been happening for years and Congress hasn’t budged on lowering the 35% corporate tax rate. Finally, this year we are likely to see the corporate rate reduced to 15 or 20% along with the elimination of some corporate write-offs. This new lower corporate tax rate may also extend to small business.  There is even talk of applying it to some if not all of the net income from self-employment, leaving more money in the business for expansion and hiring, with the ultimate goal of creating more jobs and growing the economy. Another vexing issue is the number of companies holding profits offshore to avoid paying U.S. tax. This will end, and offshore profits of U.S. companies will be taxed.  The Financial Times recently reported that Apple plans to repatriate the $215 Billion held overseas sometime this year after the corporate tax rate is reduced.  Tim Cook, Apple’s chief executive, is quoted as saying that Apple has set aside billions to pay the repatriation tax. There will probably be a one-time opportunity offered to companies like Apple to repatriate offshore money and pay a 10-percent tax.

Individual Income Tax: The President-elect and Congress both suggest reducing the current seven tax brackets down to three: 12%, 25%, and 33%.  We will see the standard deduction increased substantially, which will probably result in lower taxes for the middle class, especially for taxpayers without a home mortgage.  The President-elect suggests capping itemized deductions at $100,000 for single filers and $200,000 for Married joint filers. The House GOP plan calls for eliminating all itemized deductions with the exception of home mortgage interest and charitable contributions.  The extra taxes born out of the Affordable Care Act (Obamacare) will probably be eliminated.  These include the 3.8% Net Investment Income Tax (NIIT) and the additional 0.9% payroll tax.

Estate and Gift Taxes: Both the President-elect and the House GOP tax plans call for elimination of the estate and gift tax. There is talk of eliminating the step-up in cost basis on inherited assets, or placing a cap on the assets that can get a step-up.  However, this would cause a nightmare for beneficiaries.  How many kids know how much their parents paid for the stock they bought 30 years ago? Or the house they have lived in all their lives? 

Kenneth B. Petersen CFP®, EA, MBA, AIFA® is an investment advisor and Principal of Monterey Private Wealth, Inc., a Wealth Management Firm in Monterey.   He welcomes questions that you may have concerning investing, taxes, retirement, or estate planning.  Send your questions to: Ken Petersen, 2340 Garden Road Suite 202, Monterey, CA93940 or email them to ken@montereypw.com.