In before Tri goes gaga over the "inequities" in comparing the last two scenarios to each other. Different types of income are sometimes taxed at different rates owing to risk and return characteristics and/or public policy goals (Munis). The difference between the tax treatment between the last two scenarios is a classic example of the proper consideration of risk in the income levels of the hypothetical taxpayers.
Donald Trump’s Tax Plan: Three Hypothetical Scenarios
How eliminating the estate tax, curbing reductions and changing certain business treatments would affect taxpayers
PHOTO: ASSOCIATED PRESS
May 2, 2017 1:04 p.m. ET
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While President Donald Trump’s tax plan is lacking the details that would allow definitive analysis, tax experts say there are a number of scenarios that give insights into how some wealthier taxpayers might fare.
Here, John Voltaggio, managing director and senior wealth adviser at Northern Trust Wealth Management, and Brent Lipschultz, a partner in PricewaterhouseCoopers LLP’s personal financial services group in New York, offer some examples.
Estate Tax Elimination
In this scenario, Mr. Voltaggio breaks down what an outright elimination of the estate tax would mean for the heirs of Chris, a retired executive of a publicly traded company living in New York City.
Chris currently owns and operates a consulting firm. He also serves on several for-profit and not-for profit boards. Chris’s wife died two years ago, and his estate is worth roughly $20 million.
Chris and his late wife had used their estate/gift tax exemptions so the $20 million estate is subject to $8 million of federal tax. The elimination of the estate tax would save Chris’s estate that $8 million when it passes on to his beneficiaries.
Fewer Deductions, More Taxes
In this scenario, Mr. Lipschultz shows the negative impact of fewer deductions on Fred, a high-earner in a high-tax state.
Fred, an employee of a manufacturing business, lives in California with his wife and five children. He earns a salary of $500,000 and interest income of $20,000 annually. The couple has a $1 million mortgage at a 5% interest rate and pays $50,000 in mortgage interest and $40,000 in real-estate taxes and makes $15,000 in charitable donations annually.
This year, Fred prepaid his state taxes of $35,702. Those state taxes are not deductible for taxpayers who are subject to the alternative minimum tax as Fred and his wife are. In addition, the personal and dependent exemptions are phased out due to Fred’s level of income.
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Under Mr. Trump’s proposed plan, however, the couple’s only deductions would be for mortgage interest and charitable contributions. They would have $520,000 in income less $65,000 in deductions, resulting in taxable income of $455,000. If that is taxed at 35%, the highest tax bracket Mr. Trump has set out for individuals, their tax bill would be $159,250, an increase in tax of $35,719.
Business Owner Benefits
In this scenario, Mr. Lipschultz describes how a business owner could benefit from changes in pass-through taxes.
Sally, who is married and has no children, runs a manufacturing business and lives in California. She has partnership income of $500,000 and interest income of $20,000. Like Fred (above), she pays $50,000 in mortgage interest, $40,000 in real-estate taxes, $15,000 in charitable contributions and $35,702 in state taxes, which she prepaid this year.
Under today’s tax laws, Sally would face a tax bill of $147,248, which includes an alternative minimum tax of $17,062, self-employment tax of $29,164, an additional medicare surtax of $1,906 and a net investment income tax of $711. Additionally, due to her level of income, the personal exemptions would be phased out.
Under Mr. Trump’s proposal, her taxable income of $455,000, which includes deductions for mortgage interest and charitable contributions. However, assuming that all of her partnership income would be taxed at just 15%, her tax bill would be $72,250, a decrease of $74,998.
—Daisy Maxey
Donald Trump’s Tax Plan: Three Hypothetical Scenarios
How eliminating the estate tax, curbing reductions and changing certain business treatments would affect taxpayers
PHOTO: ASSOCIATED PRESS
May 2, 2017 1:04 p.m. ET
0 COMMENTS
While President Donald Trump’s tax plan is lacking the details that would allow definitive analysis, tax experts say there are a number of scenarios that give insights into how some wealthier taxpayers might fare.
Here, John Voltaggio, managing director and senior wealth adviser at Northern Trust Wealth Management, and Brent Lipschultz, a partner in PricewaterhouseCoopers LLP’s personal financial services group in New York, offer some examples.
Estate Tax Elimination
In this scenario, Mr. Voltaggio breaks down what an outright elimination of the estate tax would mean for the heirs of Chris, a retired executive of a publicly traded company living in New York City.
Chris currently owns and operates a consulting firm. He also serves on several for-profit and not-for profit boards. Chris’s wife died two years ago, and his estate is worth roughly $20 million.
Chris and his late wife had used their estate/gift tax exemptions so the $20 million estate is subject to $8 million of federal tax. The elimination of the estate tax would save Chris’s estate that $8 million when it passes on to his beneficiaries.
Fewer Deductions, More Taxes
In this scenario, Mr. Lipschultz shows the negative impact of fewer deductions on Fred, a high-earner in a high-tax state.
Fred, an employee of a manufacturing business, lives in California with his wife and five children. He earns a salary of $500,000 and interest income of $20,000 annually. The couple has a $1 million mortgage at a 5% interest rate and pays $50,000 in mortgage interest and $40,000 in real-estate taxes and makes $15,000 in charitable donations annually.
This year, Fred prepaid his state taxes of $35,702. Those state taxes are not deductible for taxpayers who are subject to the alternative minimum tax as Fred and his wife are. In addition, the personal and dependent exemptions are phased out due to Fred’s level of income.
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Under Mr. Trump’s proposed plan, however, the couple’s only deductions would be for mortgage interest and charitable contributions. They would have $520,000 in income less $65,000 in deductions, resulting in taxable income of $455,000. If that is taxed at 35%, the highest tax bracket Mr. Trump has set out for individuals, their tax bill would be $159,250, an increase in tax of $35,719.
Business Owner Benefits
In this scenario, Mr. Lipschultz describes how a business owner could benefit from changes in pass-through taxes.
Sally, who is married and has no children, runs a manufacturing business and lives in California. She has partnership income of $500,000 and interest income of $20,000. Like Fred (above), she pays $50,000 in mortgage interest, $40,000 in real-estate taxes, $15,000 in charitable contributions and $35,702 in state taxes, which she prepaid this year.
Under today’s tax laws, Sally would face a tax bill of $147,248, which includes an alternative minimum tax of $17,062, self-employment tax of $29,164, an additional medicare surtax of $1,906 and a net investment income tax of $711. Additionally, due to her level of income, the personal exemptions would be phased out.
Under Mr. Trump’s proposal, her taxable income of $455,000, which includes deductions for mortgage interest and charitable contributions. However, assuming that all of her partnership income would be taxed at just 15%, her tax bill would be $72,250, a decrease of $74,998.
—Daisy Maxey
