Our tax rates may change significantly in the next year or two, given the Republican sweep of the presidency and both houses of Congress.
President-elect Donald Trump and congressional Republicans agree they want lower rates and a broader taxable-income base. But they disagree on finer points, and have yet to flesh out important details.
The minority Democrats in the House and Senate may be able to stall and even undo tax legislation. Republicans may end up compromising or passing tax reform via the reconciliation process.
So let's examine some of Trump's proposed tax cuts and Congress's proposed alternatives, with the help of J.P. Morgan's Advice Lab and J.P. Morgan Private Bank in Philadelphia.
Ordinary income. Trump's campaign plan calls for reducing the number of tax brackets to three, from seven. The maximum tax rate would be 33 percent for single filers earning more than $112,500 and married couples filing jointly earning more than $225,000. The House Republican leadership plan? Same maximum rate of 33 percent but at higher incomes (over $190,150 for single filers, over $231,450 for married couples filing jointly).
Long-term capital gains and qualified dividend income. Currently, the maximum rate for both is 20 percent.
Trump's plan calls for the maximum long-term capital-gains rate to remain at 20 percent, applicable to single filers earning more than $112,500 and married couples filing jointly earning more than $225,000.
Qualified dividend-income rates are expected to remain the same as long-term capital-gains rates.
The House Republican leadership wants 50 percent of capital gains, interest income, and dividends. The Republican plan makes no distinction between qualified or ordinary, and the other 50 percent would be taxed at the three proposed ordinary income-rate brackets.
Both Trump's and Congress' proposed maximum effective rate for long-term capital gains and qualified dividend income would be 16.5 percent.
Medicare surtax and AMT. Trump and House Republicans want to eliminate the Medicare surtax of 3.8 percent and the Alternative Minimum Tax. Carried interest would be taxed as ordinary income.
Deductions for itemized expenses. Here's where it gets interesting, says Julia Fisher, wealth adviser for J.P. Morgan in Center City.
Currently, Americans can take hefty tax deductions to reduce income using a panoply of expenses, including charitable gifts, state and local income and property taxes, and mortgage interest.
Trump's plan is controversial, capping deductibility of all itemized expenses at $100,000 for single filers and $200,000 for married couples filing jointly -- even gifts to charity. The House GOP plan would eliminate deductibility for all itemized expenses with two exceptions, charitable gifts and mortgage interest paid.
"Today, you can give to charity and the charity keeps 100 cents of every dollar. Trump's plan would deduct 20 percent of whatever amount the charity gets. It's a real departure."
Applied literally to, for example, the Bill and Melinda Gates Foundation, "it would have a huge negative impact on their foundation and even someone's smaller foundation."
Added Fisher: "The proposed restriction on gifts to private charities at death could conceivably have a further tax impact."
Both Trump's and Congress' proposals are silent on donor-advised funds, which rankles Eileen Heisman, president and CEO of the National Philanthropic Trust. Jenkintown-based NPT helps clients set up and distribute money from donor-advised funds.
Trump's campaign plan also would eliminate the estate tax, to be replaced by realized capital gains in excess of $10 million, the step-up in basis for large estates and deductions for transfers to “private charity” at death. The Trump campaign plan mentions “private charity,” but the term is undefined. Presumably, it would include private foundations, but it is not clear whether it also would include donor-advised funds.
"Donor-advised funds are public, not private," Heisman said.
She's upset about the cap on charitable deductions. "We as a nation are a country of givers, and 90 percent of people who make $1 million or more are active in charitable giving. We're a country of giving money to charity, and that builds community. It doesn't make any sense," she said.
Investment implications. Tracy Maeter, global investment specialist for J.P. Morgan Private Bank, said clients are waiting until 2017 to realize their capital market gains, "when tax rates may be lower, and also because the market is so-well supported."
As for chatter that Wall Street may take profits into the inauguration?
"You will have some selling pressure in the new year 2017. That might be an opportunity to start averaging into" equities, she said. Valuations on U.S. stocks "are not cheap, but at the same time we're seeing global growth heading into 3 percent levels, and that can drive earnings growth of around 10 percent."
It wouldn't be a surprise to see "mid-single digit or even high single-digit returns in the U.S. stock market -- and that doesn't require everything to happen, such as tax reform and infrastructure spending," under the new administration.
The Treasury market, on the other hand, is repricing. And for inflation hedges, Maeter said, "at this point the best inflation protection is in equities. We also like floating-rate exposure, such as floating-rate notes and bank loans. We've had one move from the [Federal Reserve], and we see two more in 2017 of 0.25 percent each."