What the 2016 Election Means for
The year George Washington was elected President of the United States, Benjamin Franklin wrote, “In this world nothing can be said to be certain, but death and taxes.” But he never said which taxes. As voters head to the polls to elect our 45th president, that uncertainty still remains.
“Tax questions in election years often spark fears of higher levies and lower exemptions, which can make planning for the future difficult,” observes Michael Donovan, a Fifth Third wealth management advisor in the greater Chicago area.
This year is no different. Democratic candidate Hillary Clinton has said that her administration would raise taxes on the wealthiest households, while restricting deductions on a means-tested basis, and extending the holding period required for investments to qualify for the capital-gains tax rate. Republican candidate Donald Trump has made a number of tax proposals on the campaign trail,including a plan to cut the number of tax brackets to three (33%, 25% and 12%) from the current seven, and to increase standard deductions dramatically.
Big Reforms Face Uphill Battle
But large-scale changes to the tax code may not be in the cards, says Danielle English, government affairs officer for Fifth Third Bank in Washington, D.C. “Regardless of the outcome at the top of the ticket, it is still difficult to predict the terms of a congressional agenda.”
Donovan says that when clients come to him with fears about changes to the tax code, he advises them not to expect any big changes immediately after the election. The kind of policy changes that are meaningful to his clients will often find their way into legislation without much fanfare. He cites the recent change in Social Security file-and-suspend rules as an example.
In addition, Donovan says many of his clients fear that the taxfree growth in a Roth account will eventually be taxed if the government comes to need the revenue. “Many of my clients don’t want to convert into a Roth for that reason,” he observes.
The American Taxpayer Relief Act of 2012 went a long way toward setting a fairly stable consensus about many elements of the tax code, such as the estate tax, after many years of intense debate, says Melissa Register, a senior wealth planner for Fifth Third Private Bank in Cleveland.
It’s All About the Details
While large-scale tax reforms may be unlikely, the election and any changes it brings to the balance of power in Washington may have the biggest impact on the little things.
Business taxes, which don’t often make headlines, are one area where uncertainty is causing some owners to suspend their longterm planning. Glen Johnson, managing director at Mirador Family Wealth Advisors, has many business owners among his clients, and they are very close watchers of corporate tax policy reform.
As more U.S. companies choose to domicile in countries with lower taxes, corporate tax policy has become a political football. To reduce the appeal of overseas tax havens, Clinton would levy “Exit Taxes” on companies who leave the U.S., while Trump has proposed capping the tax on business profits at 15%. Regardless of who wins the election, either plan is likely to face fierce debate in Congress.
While proposed changes to personal income tax rates draw a lot of attention, other important elements of tax policy tend to go unnoticed, Register says. That’s especially true for the sophisticated techniques that tax planners often use. But the IRS is very aware of those provisions, and is always looking for new revenue. That’s why Register worries about what she calls “death by 1,000 cuts.” For example, lawmakers have had their eyes on a number of lesser-known planning techniques such as grantor retained annuity trusts, or GRATs, for years.
“The ability to use these techniques could disappear very quickly; it goes up in a bill, and boom, it’s passed. Advisors need to be aware when those are on the chopping block,” she says.
Beyond the speeches and the party platforms, it’s in the under-the–radar provisions, deductions, exemptions, exclusions and policy tweaks that the election will likely have its most profound effect on the tax code.