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Predicting Trump's Tax Plan And Its Implications

Alex Berkman 01.13.2017 | Bisnow

Tax changes from a Republican-controlled government seem imminent post-inauguration. We caught up with Berdon LLP tax partners Meyer Mintz and Daniel Shapiro, who shared five key points of President-elect Donald Trump's campaign tax proposals, including their potential impact on various groups.

1. Fewer Tax Brackets

The first key element is a reduction of the number of tax brackets, from seven to three. The top tax rate would fall precipitously from 39.3% to 33%, disproportionately benefiting the top 1% of earners in the country.

The impact of the rate and bracket revamp on the other 99% is less dramatic and less certain, but could extract 2% to 5% more from certain members of the middle class, a segment which Trump pledged to protect.

Revenue-raising measures Trump may promote include limiting "tax expenditures" - special subsidies in the form of deductions, exclusions or credits that are delivered through the tax code to encourage certain activities, Mintz said.

The proposed rate reduction may already be adversely influencing the tax-exempt bond market. When investorslook at their municipal bond portfolio, they generally compare the rate they are getting to the after-tax return on comparable taxable investments, and with tax rates going down, these bonds may not be as attractive," Shapiro said.

2. Demise of the "Death Tax"?

Trump's been vocal about his desire to significantly curb or eliminate the estate tax. This would benefit the wealthiest Americans and their families, those high-net-worth individuals with over $5.45M to bequeath or couples with $10.9M to disperse, which, according to the U.S. Census Bureau, is also around 1%.

It appears Trump would replace the estate tax with a tax on untaxed income and gains at death. For some CRE players, this could be more onerous than the death tax, given their propensity for debt-financed depreciation and equity capture, which often creates large negative tax basis.   

This likely won't be his first agenda item, as only 11,000 estate tax returns were filed in 2014, Mintz told us.

"Trump and the House have both remained silent on the gift tax and generation skipping tax, which can substantially limit lifetime transfers as well as transfers that go to grandchildren," he said.

3. AMT and NIIT May Follow

Mintz also said tax pros speculate about two more changes: a repeal of the 3.8% Net Investment Income Tax and the Alternative Minimum Tax.

"Ironically, the repeal of the AMT should benefit the residents of states with the highest tax rates - NY and CA among them - since state tax deductions are not allowed for AMT purposes," Mintz said.

In CRE, abolishing the AMT could "positively impact developers with large net operating loss carryovers," he said.

4. Corporations See Rate Slash

Corporations are subject to a top federal income tax of 35%, including long-term capital gains.

"Since many foreign investors invest through a domestic corporate blocker entity, they are at an approximate 11% disadvantage when compared to most domestic non-corporate investors, who get a preferential capital gains rate of 23.8%," Shapiro said.

If the corporate tax rate is reduced to 15% on all income, as proposed, it would drastically reduce the corporate level tax on the profits and gains, thereby increasing the after-tax profit to the shareholder.

"One flip side to this is the impact of the proposed rate cut on the tax credit market," which will likely suffer, Shapiro said.

5. Carried Interest Converted

Another facet of Trump's plan pertains to certain business promoters, including financial services and real estate professionals, with carried interest. Trump intends to designate income from carried interest as ordinary income, instead of capital gain, to help offset the cost to the government incurred by his other cuts.

It was one of the few things he and Clinton agreed on, albeit implicitly. Indeed, Trump's attitude toward carried interest is starkly opposed to that of predecessor nominee Mitt Romney, who defended the policy that greatly benefited him and other investment pros.

 

 

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