Tax Planning

Experts highlight the tax issues every financial adviser should know

Taking a closer look at tax reform

Rep. Camp's overhaul of the IRS code could mean some unwelcome surprises for the rich

Mar 9, 2014 @ 12:01 am

House Ways and Means Committee Chairman Dave Camp, R-Mich., has proposed sweeping changes to the Internal Revenue Code.

And while many of the ideas — such as a top tax rate of 35% and changes to the way derivatives are taxed — have been reported and dissected, there are new proposals that could have a major impact on ultrahigh-net-worth taxpayers.

Although few expect these proposals to be enacted this year, they will be discussed in future sessions of Congress, so they bear examination.

Here are the highlights:

• The following deductions for individuals would be eliminated: state and local income taxes, real estate taxes, medical deductions, casualty losses and tax preparation fees. This would increase the after-tax cost of state taxes by anywhere from 50% to 100%.

• To the extent that deductions were allowed, they would be limited to a 25% benefit, with an exception to the rule for charitable contributions. Such contributions could get a benefit of 35%.

• The alternative minimum tax would be eliminated, but with all these deductions being eliminated, you wonder if it would matter.

• For those in the highest income brackets, municipal bond income would be taxed at 10%.

• There would be a number of changes regarding charitable contributions. Currently, cash contributions to public charities are limited to 50% of a taxpayer's adjusted gross income, and contributions of appreciated securities are limited to 30% of the taxpayer's AGI. Instead, both of these types of contributions would be limited to 40% of the taxpayer's AGI.

Fair market value would be used to determine the amount of the deduction for publicly traded equities held for at least one year, as well as tangible property such as art given to a museum. The amount of the deduction for most other property would be limited to the taxpayer's basis in the property. As an example, the deduction for a donation of private-company stock would be the taxpayer's cost basis, not today's fair market value.

• Long-term gains would be taxed at 20%. The Camp proposal would exclude 40% of any long-term gains or qualifying dividends from income instead of having a special preferential tax rate as is the case now. In effect, this would raise the rate on long-term capital gains from 20% to 21% (60% taxed at 35%). Also, the proposal suggests that collectible gains wouldn't get the exclusion and thus would be taxed as ordinary income.

• Regarding homeownership, only interest incurred on mortgages up to $500,000 could be deducted, and no deduction would be allowed for interest on home equity loans.

Up to $500,000 of gain from the sale of a principal residence could still be excluded from income. However, this exclusion would be reduced dollar for dollar for taxpayers with an AGI in excess of $500,000. Therefore, if a taxpayer had $1 million or more in AGI, none of the gain from the sale of a principal residence would be excluded from income

• Section 1031 would be repealed. Like-kind exchanges that are exempt from tax would become subject to tax. This could have a large impact on investors in real estate.

• Contributions to both de- ductible and nondeductible traditional individual retirement accounts wouldn't be permitted. Instead, the income eligibility requirements for Roth IRAs would be repealed. Therefore, only contributions to Roth IRAs would be permissible.

The ability to re-characterize a Roth IRA contribution back into a regular IRA after a conversion would be eliminated.

We will keep you apprised as to the status of these proposals as they wend their way through Congress. We have found that once these ideas are formally proposed and “scored” for revenue impact, the possibility that they will become law increases substantially.

Robert N. Gordon (bob@twenty-first.com) is chief executive of Twenty-First Securities Corp. and an adjunct professor at New York University's Leonard N. Stern School of Business.

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Upcoming Event

May 30

Conference

Adviser Compensation & Staffing Workshop

The InvestmentNews Research team will present exclusive data and highlights from its bellwether benchmarking study that will identify best practices for setting and structuring compensation and benefits packages throughout your... Learn more

Featured video

Events

How 401(k) advisers can use 'centers of influence' to grow their business

Leveraging relationships with accounting, benefits, and property and casualty insurance firms can help deliver new business leads for retirement plan advisers.

Latest news & opinion

Things are looking up: IBDs soared in 2017

With revenue up, interest rates rising and regulation easing, IBDs are soaring.

SEC advice rule may give RIAs leg up over broker-dealers

Experts say advisers will be able to point to their role as fiduciaries as a differentiator in the advice market.

Brokers accept proposed SEC rule on who can call themselves an adviser

Some say the rule will clear up investor confusion, but others say the SEC didn't go far enough.

SEC advice rule: Here's what you need to know

We sifted through the nearly 1,000-page proposal and picked out some of the most important points.

Cadaret Grant acquired by private-equity-backed Atria

75-year-old owner Arthur Grant positions the IBD for the 'next 33 years.'

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print