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 rewind the clock 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, which took effect on Jan. 1, 2018. What can we learn from the 2017 Tax Act experience?
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.
The TCJA Barely Passed
It received 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.
Reconciliation Limits Tax Cuts
Due to filibusters, the Senate generally takes 60 votes 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 the TCJA’s 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 Tax Cuts Expire
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; and
- Passthrough businesses and sole proprietors will lose the 20% deduction of their qualified business income.
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’re 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 state and local tax deduction cap). 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’s an extension of the sunset, now’s the ideal time to take advantage of today’s “Golden Age” toolbox of opportunities. Your clients can shift assets into entities and trusts that will “squeeze” down the current value of their estate and then “freeze” their estate at that discounted value. With careful planning, your clients can still retain access, control and flexibility.
By acting now, your clients can not only lock in the benefit of today’s tax cuts but also immediately begin shifting future growth out of their estate. Waiting is costly and risky.
