How Will Trump Tax Policy Affect High-Net-Worth Individuals?

This is the first in a series of blog posts about the potential implications of President-elect Trump’s tax policy. The next post will focus on the impact for businesses.

With the January 20^th inauguration looming large, and political appointments and late-night tweets flooding the news on a daily basis, many Americans are anxious to see what type of changes a Trump presidency will usher in starting in 2017.

Income tax reform remains a large part of all presidential candidates’ platforms, and this election season was no different. Although no one can say for certain which campaign promises will materialize into passing legislation, many analysts expect that Donald Trump’s tax proposals will result in substantial rate changes for many Americans.

The following list highlights elements of President-elect Trump’s proposed changes especially applicable to high-net-worth individual taxpayers.

1. Reduction in top rates. Today’s federal income tax rates include seven brackets ranging from 10% at the lowest to 39.6% for the highest-earning Americans (couples who are married filing jointly reach this top threshold at approximately $467,000 in earnings).  Under the proposed changes, brackets would be reduced to three tiers, maxing out at a reduced rate of only 33% for incomes over $225,000. It should also be noted that long-term capital gains rates would be held at 20%.
2. Elimination of the Net Investment Income Tax. Americans earning over $250,000 were impacted by the 2013 implementation of the nation’s 3.8% surtax on investment income. Under Trump’s proposed tax revisions, this surtax would be eliminated.
3. Limitations on itemized deductions and increases to standard deductions. Also in 2013 was the reinstatement of the Pease Limitation, which limited itemized deductions for taxpayers earning over approximately $306,000 (married filing jointly). Itemized deductions were phased out by 3% of adjusted gross income up to a maximum of 80% of allowable deductions. Under Trump’s proposal, aggregate itemized deductions would be limited to a lump sum total of $200,000 for married/joint filers and $100,000 for single taxpayers. However, those utilizing the standard deduction would benefit with married/joint taxpayers receiving a bump to $30,000 in standard deductions, up from approximately $13,000.
4. Elimination of Alternative Minimum Tax. The Alternative Minimum Tax is a long-standing tax system that runs parallel to the regular tax system and was designed to require wealthy taxpayers to contribute a minimum amount of tax each year. Every year, tax forms require calculations to be performed under both systems and result in taxpayers owing the higher of the two totals. A number of regular tax deductions are prohibited under the Alternative Minimum Tax, most notably personal property and state tax deductions. Under Trump’s proposal, the Alternative Minimum Tax regime would be eliminated completely.
5. Increase in carried interest tax rates. Carried interest earned by those in the private equity world is currently taxed at a preferential 20% rate akin to long-term capital gains.  Under Trump’s proposed changes, this income would revert to higher, ordinary tax rates.
6. Changes to estate and gift taxes. The current system imposes a 40% tax on an estate to the extent it exceeds $5.45 million.  Trump has proposed the complete repeal of estate taxes; however, capital gains held until death and valued over $10 million would be taxed at a 20% rate.

We will remain diligent in monitoring the forthcoming changes to enable you to implement proactive tax-planning strategies. Please contact your Kaufman Rossin tax advisor to discuss how potential changes could affect your future tax situation.