With the personal income tax filing date of today, most of us are settling up with Uncle Sam. But given the upcoming election and the inevitable new leadership in Washington, how you manage your taxes in the near future could be a bigger challenge than in the past four years.
Let’s look at just three areas: tax depreciation, capital gains tax and estate tax. To be fair, we sourced each candidate’s tax stance using the Tax Policy Center, which presents a thorough, snapshot summary of presidential candidates' positions on tax policy but have not disclosed the candidates' names by position. You should research this for yourself.
First let’s review the bonus depreciation, which is an accelerated method of tax writeoff used by most family owned, small S corporation or partnership businesses to reduce pass-through income to owners. Currently, a best business practice would be to use the current depreciation expense rules and reduce federal taxable income to its lowest possible amount in the current year, reducing the tax liability for the owner’s personal taxable income. Note: Arkansas does not allow bonus depreciation.
If you knew who would be the next president in 2018, and the marginal tax rates would increase to 43 percent for joint taxable income over $500,000 and 48 percent on joint income over $2,000,000, you might not use bonus depreciation in 2017. If a different candidate was elected and you knew that all tax rates would decrease to 10 percent in 2018, you would probably select bonus and section 179 in 2017, knowing that tax rates would drop in the future and deductions might not be as important as in the current year.
Next, let’s look at capital gains tax rates. Assume you have a large, long-term capital gain on a publically traded stock that you have owned for the past 18 months. If you sell this year you pay the federal 23.8 percent capital gains tax and the newly passed net investment income tax (commonly referenced as the "Obama tax") on the net capital gain from the sale. Assume instead that you sold the stock next year and the law on the capital gains holding period has changed to the ordinary tax rate of 43.4 precent if held less than two years as proposed by one of the candidates. You would probably have opted to sell the stock in 2016.
Furthermore, if you knew that in 2017 the tax law would change the holding period to six years to obtain the 23.8 percent capital gains rate and included a stairstep holding period rate structure with varying tax rates up to a six-year holding period, you would again probably wish you sold the stock in 2016. Or else you would be prepared to hold the asset for as long as possible to obtain the lowest capital gain rate. On the other hand, if all tax rates on all sources of income were reduced to 10 percent, or if a 0 percent tax rate applied to all capital gains type of income as proposed by one of the candidates, you might not sell the asset. Certainly, interesting times lie ahead in the future, with tax planning.
Finally estate taxes are something that will eventually affect us all. If the estate tax law were going to be abolished in 2017, would you be concerned about making annual exclusion gifts of $14,000 in 2016? On the other hand, if you knew that the joint estate would be reduced to $7,000,000, and the limit on lifetime gifts would be $1,000,000 per taxpayer, would you move to make additional gifts this year of the $14,000 exclusion and some or all the current $5,000,000 lifetime gift amount? Confusing? Certainly! And it appears that it will be even more so in the coming months and years.
Although the outcome of the election is certainly not decided, it is important that as voting citizens we understand our candidates' stand on tax issues that will affect all of us. Take the time to research your candidate and learn what they have in store for you the taxpayer. An easy start is at TaxPolicyCenter.org., which lists tax positions of each presidential candidate.