The following is a summary of our recent podcast which can be listened to on our site here or on iTunes here.
It’s no secret President Trump is intent on reducing taxes, and with Republican control of the House and Senate, we’re likely to see changes soon. What does that mean for the individual investor and taxpayer?
This time on our Lifetime Income podcast, we spoke with Chris Hennessey, Professor Emeritus of Law at Babson College and a Member of the Putnam Investments Business Advisory Group, on his take and advice going forward.
Brackets and Surtaxes
Whether President Trump gets exactly what he’s looking for, or the Republican tax plan takes the lead, we’re likely to see changes in tax rates for both individuals and corporations.
We currently have seven tax brackets, which range from 10 to 39.6 percent, and capital gains taxes anywhere from 0 to 15 to 20 percent, depending on income and status. Under President Trump, we’re likely to see those brackets change.
Another thing for investors to consider is, because of the Medicare surtax, if they have taxable interest they could pay over 43 percent tax on their bond interest, and almost 23.8 percent on capital gains and dividends.
“That’s all part of the Obamacare/Affordable Care Act,” Hennessey said. “Interestingly, this was all done through a reconciliation process, and now the Republicans very quickly will repeal the ACA through the same reconciliation process.”
Because Republicans are going to use the reconciliation process, tax reform should be easier to accomplish, politically speaking. Through reconciliation, they can avoid the 60-vote filibuster rule in the United States Senate by connecting legislation to the budget. Part of the repeal will involve taking away that 3.8 percent Medicare surtax, Hennessey added.
Tax Obligations Will Change
There are several taxes that higher-income individuals may be dealing with currently. For example, over a certain income threshold, taxpayers begin to lose their itemized deductions.
“A married couple begins this phase out once they have over 3,800,” Hennessey said. “For every dollar over that, they’re losing 3 percent of their possible itemized deductions.”
This will likely account for another 1 to 2 percent marginal increase in taxes, Hennessey stated.
Another consideration is the possible Medicare Payroll Tax. If a single person is making over 0,000 or a married couple is making over 0,000, they pay an additional .9 percent Medicare tax on earned income.
However, with Congress working on repealing the ACA, we’re likely to see them get rid of both the 3.8 percent Medicare surtax and the .9 Medicare Payroll Tax, Hennessey stated.
Taxes Could Go Up for Some
Both corporate and individual rates are likely coming down under the Trump/Republican plan. President Trump is calling for a 15 percent corporate rate, but Hennessey doesn’t think he will get exactly what he wants. He’ll likely get closer to 20 to 25 percent after negotiations, Hennessey stated.
Individual rates are also likely to be reduced, and the number of brackets streamlined.
Both the Trump plan and GOP plan want to change the current 7 tax brackets to include only four base rates: 0, 12, 25 and 33. Also, Trump wants to cap capital gains at 20 percent. The Republicans want to bring it down even lower to 16.6 percent.
However, taxpayers with higher taxable income may lose a substantial portion of their itemized deductions under the new rules.
In those cases, it’s possible that taxpayers may have a tax increase, depending on their individual circumstances.
“Having said all that, a lot of this tax break will help the wealthy, the high tax earners, because remember they’re marginal rate today is 39.6 percent … and it’s going to be brought down to 33 percent,” Hennessey said.
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