The Trump Tax Plan

[The White Coat Investor]

Michael Zhuang summarized the "Trump Tax Plan" in his monthly newsletter. Here is his summary:

On personal income tax:

• 
  
  The number of tax brackets will be reduced from seven to three, and the top marginal income tax rate will be reduced from 39.6% to 33%.


• 
  
  Personal exemptions will be eliminated.


• 
  
  Standard deduction for married filing jointly will rise from $12,600 to $30,000.


• 
  
  Itemized deductions will be capped at $200,000 per household.


• 
  
  Mortgage interest deduction will be eliminated.

On corporate income tax:

• 
  
  Tax rate will be reduced from 35% to 25%.

On payroll tax:

• 
  
  Social security wage base will increase significantly from the current $118,500, though the final number is not yet known.

On estate tax:

• 
  
  Estate tax will be eliminated, but not gift tax.


• 
  
  Inherited property basis step-up will be eliminated as well. That means that when you sell a property you inherited from your grandpa, the tax basis (to calculate capital gain tax) of the property will not be the time you inherited it but the time your grandpa bought it. The CPA commented: "This has the potential of creating an impossible record discovery burden."

 

I'm not going to lie. I'm pretty excited about that. I mean, it would probably be terrible for our deficit, but for me personally.....dropping 7% off my marginal tax rate, I don't get personal exemptions anyway, I don't care what the standard deduction is, I'm still well below $200K for itemized deductions, I plan to pay off my mortgage this year etc. The only really bad thing there for me is the increase in Social Security tax base. And depending on how high that is set, it could overcome everything else I got. But presumably it would also come with a higher Social Security benefit, which would help.

And of course I love the idea of simplifying things. Look at all the people who could quit itemizing!

Eliminating the step-up in basis would be problematic. I mean, who has records of a stock or property bought by grandpa 60 years ago?

What do you think of the plan? Would it help or hurt you?

[jfoxcpacfp]

The SS sage base already increased to $127,200 on Jan 1, which was a big jump.

The inherited property basis step-up has a floor of either $5M or $10M (needs clarification), which would cover most people. I wrote about this in November.

One of the biggest mysteries at this point is the corporate tax. If there is a flat 15% business tax rate, that would be huge. And, of course, the 10% repatriation tax has the potential to bring hundreds of thousands of jobs back to the US.

[Craigy]

Elimination of the mortgage interest deduction, and maintaining the gift tax is a big surprise to me.  All of the previous reports showed that mortgage interest and charitable deductions were the among the only survivors.  Maintaining the gift tax while eliminating the estate tax seems counter-intuitive.  I'd love to see what the motivations are there.

The White Coat Investor wrote:

 

I’m not going to lie. I’m pretty excited about that. I mean, it would probably be terrible for our deficit, but for me personally…..dropping 7% off my marginal tax rate, I don’t get personal exemptions anyway, I don’t care what the standard deduction is, I’m still well below $200K for itemized deductions, I plan to pay off my mortgage this year etc. The only really bad thing there for me is the increase in Social Security tax base. And depending on how high that is set, it could overcome everything else I got. But presumably it would also come with a higher Social Security benefit, which would help.

And of course I love the idea of simplifying things. Look at all the people who could quit itemizing!

Eliminating the step-up in basis would be problematic. I mean, who has records of a stock or property bought by grandpa 60 years ago?

What do you think of the plan? Would it help or hurt you?

Click to expand...

+1, I would personally be very happy with this.  The brackets I have seen don't make it look like I'd save much money right now, but theoretically that shave on the top bracket will help out in another couple of years.  Simplification IMO is a wonderful thing, and makes for a much fairer system.

The step-up in basis should go away with the estate tax.  Otherwise, this would be a double dip or a complete freebie which the IRS doesn't typically hand out (arguably already this was effectively a freebie given how high the estate exemption amount has grown).

As far as maintaining records on your basis, it's in your interest to keep records of your basis since the alternative is to have no basis .  Also I believe securities firms these days are required to keep better records of your cost, so this should make things much easier in the digital age.

Increased payroll tax might not come with an increased benefit, but might simply be a means to prop up the system by shifting wealth from rich to poor.  That's pretty disappointing, but I suppose perhaps it's inevitable to keep the social security system alive.

If mortgage interest goes away I think that's not a huge loss for me.  Already this only saves me a little bit each year, and in future years it would really only be a perverse incentive to have a much larger mortgage and carry more debt than I should.  Without the mortgage interest deduction that's one more "benefit" to having your home paid off (ie, you're no longer missing out on any benefit).  In theory it will make the lending market that much more competitive, too.

[jz]

The version cited by Michael Kitches had elimination of property taxes, NOT mortgage interest.

I evaluate taxation in terms of incentives for family formation.  Not listed above is President Trump's stated intent to eliminate marriage penalty. 52% of our babies are born to single moms. Women would rather be married to BigGov than to a human man.  This occurs mostly at the low tax brackets, but as I read here, it also disincentivizes  upper bracket marriages.  Some of these babies are born into cohabs, but when the bickering starts, the cohabs are  less stable unions than marriages.

I hope the accounting industry will push back against the impossible burden of basis discovery.

[Kamban]

jz wrote:

The version cited by Michael Kitches had elimination of property taxes, NOT mortgage interest.

I evaluate taxation in terms of incentives for family formation.  Not listed above is President Trump’s stated intent to eliminate marriage penalty. 52% of our babies are born to single moms. Women would rather be married to BigGov than to a human man.  This occurs mostly at the low tax brackets, but as I read here, it also disincentivizes  upper bracket marriages.  Some of these babies are born into cohabs, but when the bickering starts, the cohabs are  less stable unions than marriages.

I hope the accounting industry will push back against the impossible burden of basis discovery.

Click to expand...

I thought that property taxes are a part of the county taxes / state taxes and not something the federal government had any authority upon.

[The White Coat Investor]

Kamban wrote:

jz wrote:

The version cited by Michael Kitches had elimination of property taxes, NOT mortgage interest.

I evaluate taxation in terms of incentives for family formation.  Not listed above is President Trump’s stated intent to eliminate marriage penalty. 52% of our babies are born to single moms. Women would rather be married to BigGov than to a human man.  This occurs mostly at the low tax brackets, but as I read here, it also disincentivizes  upper bracket marriages.  Some of these babies are born into cohabs, but when the bickering starts, the cohabs are  less stable unions than marriages.

I hope the accounting industry will push back against the impossible burden of basis discovery.

Click to expand…

I thought that property taxes are a part of the county taxes / state taxes and not something the federal government had any authority upon.

Click to expand...

It's the deduction for them that he's referring to, which the Feds definitely control.

And everyone bear in mind these proposals are just that, they're not even a bill, much less a law. So if you've seen different "versions", don't be surprised. If a law is passed at all, it will inevitably look different from what I posted in some way. But it can be fun to think about.

[jz]

@Kamban, Yes, property taxes are collected by your county, but federal form 1040, schedule A, line 7 allows for an itemized deduction of your property taxes against your federal income taxes.

[Craigy]

jz wrote:

I evaluate taxation in terms of incentives for family formation.  Not listed above is President Trump’s stated intent to eliminate marriage penalty. 52% of our babies are born to single moms. Women would rather be married to BigGov than to a human man.  This occurs mostly at the low tax brackets, but as I read here, it also disincentivizes  upper bracket marriages.  Some of these babies are born into cohabs, but when the bickering starts, the cohabs are  less stable unions than marriages.

Click to expand...

The elimination of the marriage penalty is a big deal for me.  We need to move forward and away from the previous archaic, sexist marriage penalty.  It's surprising that it's lasted as long as it has.

jz wrote:

 

I hope the accounting industry will push back against the impossible burden of basis discovery.

The idea that keeping records for basis is somehow overly burdensome is BS.  If it's somehow impossible to find out grandpa's basis in a property because he bought it in 1963, that probably means you don't have any basis anyway because grandpa bought it in 1963.  With inflation and depreciation, chances are any purportedly undiscoverable basis is going to be de minimis so this is a non-issue.

The step-up in basis is not some mechanism to help people figure out their basis, it's to rightfully give them the basis that they have earned since death is a taxable event in the United States.  Again, there has only been this freebie step-up in basis in recent history with the large estate tax exemption amount.  And as Johanna pointed out above, the info floating around is that the step-up may be retained for the first $5M of property anyway (which still might cause a lot of paperwork for accountants and fights among succession attorneys for larger estates).

Finally, why would the accounting industry turn away burdensome rules that allow them to bill more hours?  

 

[Zaphod]

I would obviously be excited about the tax decrease as was prior stated for pass through entities, its almost a 50% effective tax break if its capped at 15%, so I assume it wont happen.

Even if it does, like WCI says, it will be vastly different than the proposals. It will also likely take a long time and we wont see anything until 2018ish I've heard. I'd like it to be first thing but it seems they have other priorities to knock out first.

Though  if just a broadly applied rate I dont think it amounts to much of anything other than a corporate handout. While our nominal rates are high, our effective rates are very low. If they made it easier on smaller businesses and took away laws that incentivized companies to not do geographical arbitrage, etc...that will be great. There were some good things in the original proposal, having read the whole original. Double dividend taxes going away makes sense as well. Who knows what ends up being enacted or what gets compromised to do so.

[jfoxcpacfp]

jz wrote:

I hope the accounting industry will push back against the impossible burden of basis discovery.

Click to expand...

Let's see - how hard is it to track basis today? The assets that will typically need to be tracked are:

• Real estate (public records)


• Securities (your broker is legally required to track or you can look on an internet database)


• Rare antiques, jewelry, collectibles, and so forth (might be a problem)


• Currency: gold, silver - could get a little hairy if hoarded for many years


• Businesses - basis is not required to be tracked by the CPA but if you own a business that will cause you to have an estate problem, you darn well better have a CPA keeping track.

I really don't see a nightmare, certainly not an impossible burden. Most people, especially HNW, keep pretty good records. I'm sure I'm missing a few areas - what are they?

[jz]

@jfox,  our equities basis (at Vanguard) prior to 2011 are all lumped together.

[Allonblack]

Outside of the newsletter you mention, I can't find a single reference online to Trump's tax plan eliminating the mortgage deduction. I would be very surprised to see this happen. The mortgage deduction is very popular and strongly defended by the National Association of Realtors - even if it makes little sense from an economic perspective. As for the plan's effect on me, a trump presidency makes an E. Warren presidency just in time for me being an attending far more likely. So higher national debt now that I can pay off as an attending later. Net negative.

[East coast]

Since I've said this to others on this board when they say "I heard that that so and so is planned regarding this and that regulation/tax plan...", I feel an obligation to say here -

Wake me up when something actually changes! (or at the minimum, a written proposal is in front of the various legislatures)

[artemis]

jz wrote:

@jfox,  our equities basis (at Vanguard) prior to 2011 are all lumped together.

Click to expand...

Yes, and that's given me some headaches as this year I'm donating some appreciated shares to charity, and not having a cost basis other than "average cost" for pre-2011 shares is a pain.

Bumping up the cap on SS needed to be done, but it hurt more than I expected it would.  Other than that, I don't see any proposed changes that affect me too negatively (although I'd hate to lose the property tax deduction).

[WallStreetPhysician]

The White Coat Investor wrote:

Michael Zhuang summarized the “Trump Tax Plan” in his monthly newsletter. Here is his summary:

On personal income tax:

• 
  
  The number of tax brackets will be reduced from seven to three, and the top marginal income tax rate will be reduced from 39.6% to 33%.


• 
  
  Personal exemptions will be eliminated.


• 
  
  Standard deduction for married filing jointly will rise from $12,600 to $30,000.


• 
  
  Itemized deductions will be capped at $200,000 per household.


• 
  
  Mortgage interest deduction will be eliminated.

On corporate income tax:

• 
  
  Tax rate will be reduced from 35% to 25%.

On payroll tax:

• 
  
  Social security wage base will increase significantly from the current $118,500, though the final number is not yet known.

On estate tax:

• 
  
  Estate tax will be eliminated, but not gift tax.


• 
  
  Inherited property basis step-up will be eliminated as well. That means that when you sell a property you inherited from your grandpa, the tax basis (to calculate capital gain tax) of the property will not be the time you inherited it but the time your grandpa bought it. The CPA commented: “This has the potential of creating an impossible record discovery burden.”

 

I’m not going to lie. I’m pretty excited about that. I mean, it would probably be terrible for our deficit, but for me personally…..dropping 7% off my marginal tax rate, I don’t get personal exemptions anyway, I don’t care what the standard deduction is, I’m still well below $200K for itemized deductions, I plan to pay off my mortgage this year etc. The only really bad thing there for me is the increase in Social Security tax base. And depending on how high that is set, it could overcome everything else I got. But presumably it would also come with a higher Social Security benefit, which would help.

And of course I love the idea of simplifying things. Look at all the people who could quit itemizing!

Eliminating the step-up in basis would be problematic. I mean, who has records of a stock or property bought by grandpa 60 years ago?

What do you think of the plan? Would it help or hurt you?

Click to expand...

I try not to get wrapped up in all of the tax proposals until the bill is signed.  At that point, I'll strategize around the new law accordingly. House Republicans have a different plan from Trump, and surely the Democrats will seek to have some of their agenda included in the bill. We voted in November, it's out of our hands now...