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Oxford Financial Group, LTD


Oxford Financial Group, LTD


Expert Perspective

News, research and market insights from our team of experts.


Current Issue | December 20, 2018

The Deal of the Decade… Literally

By: Julia S. Weaver, J.D., Director, Family Office Services & The Trust Company of Oxford and
Scott Simmons, J.D., LL.M., Wealth Strategist

In the world of tax reform, let the negotiations begin. On April 26th, President Trump released his anticipated tax reform proposal. The President’s proposal is broad in scope and narrow in details, considered by many to be good rules of negotiation.

The proposal does, however, provide a peek behind the curtain as to issues on the table and the integration of President Trump's campaign proposal with that of the House GOP (details to follow). What we do not see in this proposal is anything new or unexpected.

As was anticipated, this proposal will be subject to the Byrd Rule, which allows the Senate to block legislation that would increase the deficit beyond a ten year period. In other words, this plan must pay for itself within ten years or it must incorporate a ten year sunset provision, i.e. an expiration date. The sunset of the EGTRRA in 2010 was an example of the Byrd Rule.

The net effect: Not only continued short term uncertainty, but possibly a decade of uncertainty.

The following is a cursory summary of the cursory proposal, as well as some initial considerations for planning in these uncertain times.

Income Tax Brackets
President Trump's latest proposal adjusts tax brackets only slightly from his campaign proposal. The lowest bracket is now slated as 10% and the top bracket is increased to 35%, both with a middle bracket of 25%. The upper income limits of each bracket were undefined, but President Trump's campaign proposal set the threshold for the highest tax rate at $225,000 for a married couple compared to $231,450 in the House GOP proposal. In furtherance of simplification, the proposal does call for the elimination of the AMT.

Standard and Itemized Deductions
The President's proposal calls for doubling the standard deduction, while introductory comments referenced a standard deduction of $24,000 for a married couple. The President's plan adopts the House GOP version regarding itemized deductions, proposing to eliminate all but the mortgage interest and charitable contributions deductions. A focus of media attention is the elimination of the state and local income tax deduction. The ramifications to residents of high income tax states could be tremendous.

The Pease limitations could still apply to phase-out itemized deductions but that detail remains unclear. In years of high AGI, this can result in a reduction of these deductions of up to 80% (leaving only 20% for use by the taxpayer).

Capital Gain and Qualified Dividend Rates
The latest proposal simply states "[r]epeal the 3.8% Obamacare tax that hits small businesses and investment income". Because no other detail was provided, it is unclear whether this plan includes the campaign proposal to retain the current Capital Gain and Qualified Dividend tax rates of 0%, 15% and 20%.

In addition, if the top income tax bracket threshold is reduced as anticipated, taxpayers will bump from the 15% to the 20% capital gains tax rate at a much lower AGI, i.e. an increase in this tax for many.

Estate & GST Taxes
President Trump is now calling for the elimination of the "death tax". Presumably this is simply a more vilifying name for the estate tax, as our current tax regime has no reference to a "death" tax. It is unclear whether the gift tax and generation-skipping taxes are proposed to be repealed.

His campaign proposal replaced the current estate tax with a tax on capital gains at death in excess of an exemption amount of $5,000,000 per individual / $10,000,000 per married couple. This would result in essentially an ongoing "death" tax, albeit under the income tax code instead of the estate tax code. To taxpayers, a tax is a tax.

Corporate Taxes
President Trump's proposal calls for a reduction of the corporate tax rate from the current 35% to 15%. This may also be applied to many small business (pass-through entities) that may benefit from an ability to pay income taxes at a reduced corporate rate rather than on their 1040 at higher individual rates. Treasury Secretary Steve Mnuchin indicated that additional detail would be provided at a later time regarding the definition of a "small business" for these purposes. Notably, this reduced rate may apply to only accumulated earnings.

Preliminary Wealth Planning Considerations

Know When to Hold
At this preliminary stage, basing wealth planning decisions on tax reform would not only be premature, but unwise. The final nature of tax reform, if any, could look vastly different from its current state and could include sunset provisions. As reform negotiations ensue, there will be ample time for analysis of the impact to your specific wealth plan. Even if we do see reform in alignment with the current proposal, we may see very little impact on foundational estate planning.

Know When to Fold
Create back doors, side doors and fire escapes. Tax reform aside, all planning strategies should include provisions to maximize the flexibility to adjust your plan for not only changing tax laws, but also for changes to your family's goals and objectives. Your advisors can provide options to embed this flexibility into your current plan and all future planning techniques.

Final Thoughts
Tax laws are complex and are often political hotbeds for special interests. Your Oxford team of advisors is monitoring tax reform to maximize estate and tax planning opportunities. In the interim, enhancing flexibility and focusing on a family's true goals and objectives is always sound planning.

The above commentary represent the opinions of the author as of 5.4.17 and are subject to change at any time due to market or economic conditions or other factors.