Anybody stay up late Tuesday night? I know I did, but not for the reason that comes immediately to mind. While most of my fellow citizens were eagerly anticipating election results, the tax professionals at Berdon were busy thinking through the impact that the election could have on our clients’ taxes.
While any proposed framework set forth by President-Elect Trump still has a long way to go before materializing into law, a wide swath of federal tax cuts seems to be heading our way. Proposals include a drop of the top individual tax rate from 39.6% to 33%. As part of the proposed repeal of the Affordable Care Act, the 3.8% tax on investment income would be eliminated. Surprisingly, the proposals to eliminate the AMT as well as preferential capital gain rate treatment for carried interests still remain in place. Corporate tax rates would decrease from 35% to 15% and the corporate AMT would also be eliminated. Repatriation of offshore corporate profits would be “encouraged” with a one-time tax rate of 10%. Estate tax repeal is still on the table as well.
For those of you fixated on your federal tax bill, don’t spend those savings just yet. You may not be getting everything anticipated if you briefly forgot about our federalist system (or as I like to refer to it, the state and local tax practitioner full employment act) and the propensity of state and local tax jurisdictions to go their own way.
The states put an array of tax issues on the ballot for voters. Most notably, California residents overwhelmingly voted to extend the “temporary” income tax rate hikes enacted in 2012. The rate hike, set to expire in 2018, will now be in place until 2030. Those making over $1 million will continue to pay a top rate of 13.13%. In a much closer vote, Maine residents voted to increase their top tax rate from 7.15% to 10.15%.
As to what state governments will propose and implement as law during the next four years, nobody knows. Federal tax cuts need to come from somewhere and a reduction of funds flowing to the states certainly wouldn’t be a surprise. So are we in store for state tax increases? Nobody knows for sure.
Questions about your tax planning? Contact Wayne Berkowitz at WBerkowitz@BerdonLLP.com or your Berdon advisor.
Wayne Berkowitz, a tax partner and head of the State and Local Tax Group at Berdon LLP, advises on the unique requirements of governments and municipalities across the nation.