LUTZ BUSINESS INSIGHTS
Clinton vs Trump: An Impartial Look Into the Tax Plans of Each Candidate
NICK HALL, INVESTMENT ADVISER
As the election continues to heat up this fall, one of the biggest areas of discussion will revolve around the tax plans of each of the leading candidates. This blog will take a deeper look into the proposed tax plans of each candidate and how they may affect you.
1. Personal Income Taxes
Currently, taxable income brackets range from 10% at the bottom to 39.6% at the top. In 2016, the top marginal tax rate comes into play with single filers showing income in excess of $415,050 and married joint filers making $466,950 and higher in taxable income. There is also a 3.8% surtax on total net investment income, or the amount of your Modified Adjusted Income (MAGI) that exceeds $200,000 for individuals and $250,000 for married couples filing jointly.
Trump Plan: Under Trump’s proposed tax plan, he would cut the highest marginal income tax rate to 33%. He has also proposed to lower the tax rate on all business income to 15%, which would apply to partnerships and sole proprietorships. This would likely see a huge increase in business owners looking to turn individual income into “pass through” income at these preferential rates. Trump also intends to lower taxes across the board, which falls in line with the House Republicans’ earlier proposal to lower the 15% income tax bracket to 12%. Trump has also proposed to make child care expenses tax deductible. This would clearly have the biggest individual impact on people in high income tax brackets.
Clinton Plan: Clinton’s personal income tax plan would stay very similar to today, as it would generally only significantly impact the top 5% earning households. She has proposed a 4% tax surcharge for any person(s) earning in excess of $5,000,000. This would increase the top marginal bracket for the highest earnings to nearly 44%. Clinton also wants to make child care more affordable and has discussed some type of refundable tax credit instead of a tax deduction like Trump.
2. Capital Gains
The capital gains landscape has changed over the last decade. Investors in the lowest two marginal brackets (10% and 15%) get a reprieve and are not taxed on long-term capital gains. A majority of Americans still pay the standard 15% on long-term capital gains as part of tax law that changed in 2003 under the Bush administration. However, the American Taxpayer Relief Act of 2012 instituted a 5% bump in the long-term capital gains rates for people in the highest marginal tax brackets (taxable income exceeding $415,050 for single and $466,950 for married joint filers) moving this number to 20%. Remember, the 3.8% surtax also applies to these high income earners meaning capital gains rates are effectively 23.8% for these taxpayers. Additionally, a capital gains tax rate of 25% applies to selling real estate that you have depreciated. One last capital gains tax rate that is not widely used is a 28% tax rate on small business stock and collectibles. Short-term capital gains rates for assets held less than one year are currently taxed at marginal income tax rates for a taxpayer(s).
Trump Plan: Trump has not really hinted at any wholesale changes to capital gains. It is assumed he would keep the lower long-term capital gains rates that currently exist.
Clinton Plan: Clinton’s plan calls for the highest earning households to carry a capital asset for 6 years before the top rate on capital gains would be treated as a long-term gain and come down to 23.8% (20% + 3.8% surtax). Again taxpayers earning in excess of $5,000,000 would be subject to additional 4% surtax pushing this rate up to 27.8%.
3. Alternative Minimum Tax (AMT)
AMT is a parallel tax system to the regular Federal income tax. AMT applies to taxpayers with high income by setting a limit on how much a taxpayer can utilize certain tax benefits. It basically sets a minimum amount of tax to be paid. The current AMT rates are 26% and 28% for individual and married joint filers. Once a taxpayer exceeds certain exemption amounts, they must calculate income in a separate computation from the regular tax bill. If there is a difference, taxpayers are required to pay the AMT in addition to regular tax.
Trump Plan: Trump has indicated he plans to repeal AMT.
Clinton Plan: Clinton is a proponent of “The Buffett Rule” which would tax households with income in excess of $1,000,000 at a minimum effective tax rate of 30%.
4. Corporate Taxes
The current corporate tax rates top out at a flat rate of 35%. However, corporations may potentially be eligible for tax credits which would reduce federal, state, or even local income taxes.
Trump Plan: In one of the biggest differences between plans, Trump has proposed a corporate tax schedule that would tax corporations at 1% up to $30,000 in income, 5% from $30,000-$100,000, 10% from $100,000-$1,000,000, and finally 15% for income in excess of $1,000,000.
Clinton Plan: There is no specific proposal on changing the current corporate tax rate environment.
5. Itemized Deductions
The existing limitation phases out deductions at 3% for every dollar of adjusted gross income that exceeds $250,000 for an individual taxpayer and $300,000 for those married filing jointly.
Trump Plan: Trump has proposed to steepen the curve on the phase-out of itemized deductions under the current limitation.
Clinton Plan: Clinton has proposed to cap the maximum tax benefit of itemized deductions at 28%. This would adversely affect the highest earning individuals.
6. Estate Taxes
As part of former President Bush’s tax cuts, the lifetime exemption was increased to $1,000,000 in 2002 and indexed for inflation so that by 2009 the estate tax exemption was $3,500,000 per individual. In 2010, the legislation expired and there was no exemption amount for the calendar year 2010. As part of the 2010 Tax Relief Act, President Obama and Congress reinstituted the estate tax exemption at $5,000,000 per individual with an inflation rider. This legislation also introduced the concept of portability between spouses which allows a spouse to “port” over any unused exemption to the other spouse upon the first death. In 2016, the estate tax exemption amount is $5,450,000 per individual with the estate tax set at 40% for amounts exceeding the $10,900,000 between spouses.
Trump Plan: Trump has proposed to eliminate the estate tax altogether.
Clinton Plan: The Clinton plan has proposed to raise the estate tax to 45%. Clinton has also proposed to lower the lifetime estate tax exemption to the 2009 level of $3,500,000 per individual.
The intent of this blog was to highlight key features of the proposed tax plans for the two major party candidates. It is merely informational, and it should be noted that these proposals are merely suggestions and would still need to be legislated by Congress as well. You should consult with your tax advisor to determine how any tax law changes that may be passed after the election would impact your personal financial situation.
Important Disclosure Information
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Lutz Financial), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from Lutz Financial. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. Lutz Financial is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of Lutz Financial’s current written disclosure statement discussing our advisory services and fees is available upon request.
ABOUT THE AUTHOR
NICK HALL, CFP® + INVESTMENT ADVISER
Nick Hall is an Investment Adviser at Lutz Financial with over eight years of industry experience. He specializes in comprehensive financial planning and investment advisory management services.
AREAS OF FOCUS
- Financial Planning
- Investment Advisory Services
- Retirement Planning
- Income Tax Planning
- Social Security and Medicare Planning
- Education Planning
- Investment Product Research
- Small Business Owners
- High Net Worth Families in Transition
AFFILIATIONS AND CREDENTIALS
- Financial Planning Association of Nebraska, Member
- Certified Financial Planner
- BSBA in Finance and Business Management, Eller College of Management - University of Arizona, Tuscon, AZ
- Mount Michael Benedictine, Alumni Board President-Elect
- Lutz Gives Back, Committee member
- United Way, Volunteer
- Salvation Army, Volunteer
- Omaha Home For Boys, Volunteer
- Susan G. Koman Race for the Cure, Volunteer
- Qualified Charitable Donations: Using IRAs as a Charitable Piggy Bank for Investors
- New Tax Legislation and Individual Financial Planning Strategies
- The Ins and Outs of Health Savings Accounts (HSAs)
- Sorting Through the Medicare Alphabet Soup
- Is it Time to "Beary" This Bull Market?
- Does a Roth IRA Conversion Make Sense for You?
- Clinton vs Trump: An Impartial Look Into the Tax Plans of Each Candidate
- Tax Deferral: A Very Powerful Financial Planning Tool
- Volatile Markets Can Lead to a Potential Harvest
- Back to School Education Planning
- Taking Social Security Benefits Early or Late: The Great Debate?
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