In December 2017, President Donald J. Trump signed the Tax Cut and Reform Bill at the White House, bringing significant shifts to both individual and corporate tax landscapes. Investors are now watching closely as Congress prepares to engage in negotiations over incoming President-elect Donald Trump’s economic policies, especially with tax strategies being a major point of discussion.
Financial professionals believe there are valuable insights to be gained from Trump’s pivotal tax changes in 2017. During his campaign, Trump committed to fully extending the array of tax breaks established by the Tax Cuts and Jobs Act (TCJA) of 2017. This act introduced wide-ranging adjustments for both citizens and businesses. He also proposed innovative policies, including removing taxes on tips, ceasing taxation of Social Security benefits for seniors, and eliminating the $10,000 cap on the State and Local Tax (SALT) deduction, among other initiatives.
Interestingly, while many Republicans support Trump’s plans, the specific proposals that will eventually get the green light remain uncertain, especially given the current concerns over the national budget deficit. This uncertainty poses challenges for anyone trying to plan for changes in the tax code. Nonetheless, Trump’s 2017 tax reforms offer valuable lessons, according to financial experts.
Strategic Tax Moves Before Deadlines
If Congress does not take action, many tax breaks from the TCJA will expire after 2025. These include lower tax brackets, increased standard deductions, enhanced child tax credits, and a higher exemption for estate and gift taxes, to name a few. With control over the White House, Senate, and House of Representatives, Republican leaders intend to address these expiring provisions through a process called "reconciliation," allowing them to bypass a filibuster. This was the same approach used to implement the TCJA at the end of 2017.
Ahead of the law’s effect at the start of 2018, some investors used last-minute tactics, like prepaying property and state income taxes to accelerate itemized deductions, as explained by Duncan Campbell, a certified public accountant at Baker Tilly’s private wealth division. This strategy was especially popular with high earners in states with high taxes, like California, New Jersey, and New York, as they were soon to face a $10,000 federal deduction limit on SALT, covering property and state income taxes.
Planning for Potential Changes
Financial advisors are advising caution, suggesting clients hold off on making irreversible changes to their tax plans until there is a clear legislative decision. Ryan Losi, a certified public accountant and executive VP at CPA firm Piascik, emphasized the importance of acting on what is currently certain rather than speculating about future changes.
Over the past year, Losi has recommended that high-net-worth clients with estates exceeding the estate and gift tax exemption consult legal experts about strategies to mitigate potential taxable estates if Congress fails to extend the current heightened limits post-2025. At that time, the basic exclusion amount will increase to $13.99 million per person, applicable to tax-free wealth transfers during life and at death. Without extension, it will fall back to 2017 levels, adjusted for inflation. "Preparing yourself for necessary actions should the exemptions not be extended is crucial," Losi advised.
While there’s a better chance of seeing the extended estate tax exemption with a Republican-led Congress, last-minute changes are always possible, as experienced in 2017. As Losi quipped, "We might get a surprise ‘Trump Christmas gift’ that catches everyone off guard."
Navigating Uncertainty and New Legislation
When the TCJA was passed at the tail end of 2017, it left financial advisors with a tight timeframe to grasp all the changes before they came into effect at the start of 2018, said Campbell from Baker Tilly. Initial uncertainties accompanied many of the newly introduced provisions, he added.
For example, there was initial confusion regarding the step-by-step calculations for the qualified business income deduction, allowing up to 20% of eligible revenue for pass-through businesses, Campbell noted. After legislative approval by Congress, tax professionals often race against time to answer lingering questions, which the IRS later clarifies through detailed guidance.
