In last week’s post, I made a plea for unity as the inauguration approached. The inauguration happened yesterday, the country is still surviving, now what? As a tax lawyer, the question I get most about Trump is, what tax legislation can we expect?
We’ve been here before. Let’s wind the clock back eight years to 2017, the last time we had a “triple R” government (Republican Senate, House, and White House). Like now, tax reform was on the priority list. By the end of 2017, we had the Tax Cuts and Jobs Act (often called the “Trump Tax Act”) that became effective on January 1, 2018. What can we learn from the 2017 Tax Act experience?
First, tax legislation is complicated. Last time, it took all year to make it happen, passing in December 2017. I expect the same this time, although Trump is trying to package up everything in one “big, beautiful bill.” There are legislative priorities (such as border security, energy, and increasing the defense budget) that will be easier to push through—expect them to go first. Even Senate Majority Leader John Thune expects tax legislation to lag until later in the year.
Second, the 2017 Trump Tax Act barely passed, receiving only 51 aye votes in the Senate. Unsurprisingly, not one was a Democrat. With razor thin Republican majorities in the House and Senate, I expect the same this time. If the tax legislation passes, it will likely pass very narrowly, without one Democrat vote.
Third, due to filibuster, it generally takes 60 votes in the Senate to pass legislation. To pass with only 51 votes, tax cuts have to be part of the budget reconciliation process. Here’s the rub. Reconciliation prohibits tax cuts that extend beyond a budget window (typically 10 years), unless the cuts are “paid for” with new revenue or spending cuts. That’s why most of Trump’s 2017 tax cuts had an expiration date at the end of this year. Expect the same this time around—tax cuts with an expiration date.
If these 2017 tax cuts expire next New Year’s Day here’s what will happen:
- The top individual tax rate will increase from 37% to 39.6%
- The estate tax exemption will cut in half from about $14 million to about $7 million
- The Pease cut-back returns, causing high-income taxpayers to lose part of their itemized deductions
- Passthrough businesses and sole proprietors will lose the 20% deduction of their qualified business income (“QBI”).
This leads to the big question on so many minds: with the Republican trifecta, will those cuts actually expire this year or will the sunset date be extended? And if extended, for how long?
We are painfully aware of the mounting federal debt, now at $36 trillion. Just extending the 2017 tax cuts adds $4.6 trillion to the deficit over 10 years. Additional proposed tax breaks would add considerably more (such as eliminating tax on tips, overtime pay, and social security, cutting the corporate income tax rate to 15%, and lifting the $10,000 “SALT” cap for state and local taxes). As the budget bargaining begins, don’t be surprised if the extension of tax cuts is far less than 10 years (some suggest a window of two to five years). Some Republicans will be concerned about the cost, and agreeing on “pay fors” will be a heavy lift in this Congress.
While we watch them duke it out, here’s a word to the wise: the day will come when these tax breaks (such as a doubled $14 million estate tax exemption) will go away. When the pendulum swings, “squeeze and freeze” transfers to Grantor Trusts will also likely go away. But as we’ve seen in prior legislative proposals, when that day of reckoning comes, those who already did squeeze and freeze planning will almost assuredly be grandfathered.
Even if there is an extension of the sunset, now is the ideal time to take advantage of the “Golden Age” toolbox of opportunities available today. You can shift assets into entities and trusts that will “squeeze” down the current value of your estate, and then “freeze” your estate at that discounted value. With careful planning, you can do this and still retain access, control and flexibility.
By acting now, you not only lock in the benefit of today’s tax cuts, you also immediately begin shifting future growth out of your estate. Waiting is costly and risky. As my TIGER 21 chair Jack Mueller wisely says, “The greatest return we can get from anything we do is estate planning.” You won’t regret it. In fact, years from now, your family and you will be giving you a big pat on the back.
With Trump back in office, Marvin Blum ponders what tax legislation will pass, and the impact it will have on the Internal Revenue Code.