With Republicans now controlling the White House and Congress, it’s possible that we could see the first significant comprehensive reform of our tax code since 1986. While it’s still too early to tell precisely what a comprehensive tax reform plan might include, there are a number of proposals on the table that are focused on simplifying the code, broadening the tax base, and eliminating loopholes.
President-elect Trump has said that his tax proposals are a starting point for negotiations, as part of the process to get comprehensive tax reform passed. As such, the final outcome may not exactly resemble what has been proposed so far. With that in mind, here are five significant tax code changes we might see in the coming Trump administration:
1. Closing the carried interest loophole
Carried interest allows the managers of certain private equity funds to treat much of their earnings as long-term capital gains rather than ordinary income, reducing the amount of taxes they must pay by almost 50%. There is substantial bipartisan support for closing this loophole and treating carried interest as ordinary income.
2. Eliminating the surtax on net investment income
The Affordable Care Act (ACA) introduced a 3.8% surtax on net investment income for taxpayers with an adjusted gross income of $200,000 (single) or $250,000 (married filing jointly). With Republicans eager to repeal and replace the ACA, this surtax potentially could be eliminated.
3. Reducing corporate tax rates
From a global perspective, the US tax on corporate income is high (up to 35% in some cases). A Trump administration and Republican-controlled Congress likely will seek to reduce corporate taxes in an effort to make the US more competitive with other nations.
4. Encouraging repatriation of corporate assets
During the campaign, Donald Trump proposed a one-time, 10% tax rate “holiday” for corporate profits brought back to the US from abroad. The hope is that the revenue generated would help pay for the tax cuts provided to individuals under his plan.
5. Transformation of gift and estate taxes
There’s a strong possibility that the current gift and estate taxes will be repealed. However, if that were to happen, there also is talk of eliminating the ability to “step up” the basis of investment assets at the time of death, which would result in either a carryover basis or the potential requirement to pay capital gains taxes at death.
Implications
Invest in a tax-efficient manner
It is important to work with a wealth manager focusing on tax-efficient investing, not simply tax-efficient investments. Don’t just seek to maximize returns, seek to maximize after-tax returns. Harvest tax losses throughout the year and consider whether certain investments (like tax-exempt municipal bonds) still make sense in a potential lower-tax environment.
Stay the course on estate planning
Even if the estate tax is eliminated, strategies such as grantor-related annuity trusts (GRATs), irrevocable life insurance trusts (ILITs) and intentionally defective grantor trusts (IDGTs) are still valuable tools to help ensure the smooth, tax-efficient transfer of your wealth to future generations.
Be mindful of asset location, not just allocation
While allocation is important, where you hold your investments also can play a big part in optimizing your overall, after-tax return. Place tax-efficient assets in taxable accounts and make sure tax-inefficient assets are in tax-deferred accounts.
Explore more insight from BNY Mellon Wealth Management.
This article was produced by BNY Mellon and not by the Quartz editorial staff.