With tax policy shaping up to be a major issue in the 2016 presidential campaign, accountants and advisors working with wealthy taxpayers are analyzing proposals from the two major party candidate and considering tentative plans based on results of the election. Here’s a quick look at the Hilary Clinton’s tax plans and a look at how her plan would affect wealthy clients. Check back on Thursday for a similar analysis of Republican nominee Donald Trump.
Hillary Clinton’s tax proposal includes raising taxes on high-income taxpayers and increasing estate and gift taxes. The Tax Policy Center projects that Clinton’s plan would increase revenues by nearly $1.4 trillion over the next decade. Nearly all of that would come from the top 1% of high income households, resulting in an average reduction in after-tax income of about 7%.
“Fair Share” Surcharge
Her plan includes a 4% surcharge on adjusted gross income (AGI) over $5 million, a minimum tax of 30% of AGI phasing in between $1 million and $2 million of income, and a 28% limit on the tax benefit from certain itemized deductions other than charitable contributions.
Her proposal would also add significant complexity to capital gain tax rates. As it currently stands, assets held longer than one year are eligible for a preferred long-term capital gains tax rate of 23.8% (a 20% capital gains tax plus a 3.8% net investment income tax (NIIT). Under Clinton’s plan, assets owned between one and six years would be subject to a tiered rate schedule. Assets held under one year would be subject to a top rate of 43.4%. Only assets held longer than six years would be eligible for the 23.8% rate.
Estate taxes would increase substantially and affect more taxpayers under Clinton’s plan. For the tax year 2016, estates valued at under $5.45 million are not subject to the estate tax and that exclusion is indexed for inflation. Clinton’s proposal includes reducing the threshold to $3.5 million and removing the index for inflation. The current 40% tax rate would be replaced by tiered rates of 45%, 50%, 55%, or 65% for estates valued at more than $500 million.
Accountants and advisors who work with high-income individuals face a lot of uncertainty when it comes to helping their clients plan for tax changes after the election. Adding to the uncertainty is the fact that either candidate will have to work with a potentially narrowly divided House and Senate, so major tax reform could be an uphill battle for either party.
Under a Clinton presidency, wealthy taxpayers may want to make major tax moves, such as selling appreciated assets or accelerating income, before the end of 2016 in case rates increase in 2017.
Whatever the outcome of the election, it’s impossible to know what changes will actually get through and when they will go into effect. Uncertainty always makes planning for tax time a challenge, but with two candidates with diametrically opposed tax proposals, this election makes tax planning even more difficult – and the stakes higher.
Check back on Thursday for our analysis tax changes under a Trump presidency.
To get ready for the big tax changes, having the best accounting and finance talent should be a priority. To help manage your existing accounting function, check out our Workforce Planning Guide.