"Kee" Points with Jim Kee, PhD.

In preparing for a talk on election year investing I have outlined the key differences between Donald Trump and Hillary Clinton with respect to taxes on individual income, corporate income, estates, and investment gains (dividend and capital gains). What follows is the gist of what’s in play for the majority of individuals. I have not included an economic analysis of the proposed tax changes because it would make this week’s Kee Points too long, but I hope to do that briefly prior to the election.


WHAT’S IN PLAY – INDIVIDUAL INCOME TAXES:

Trump: Trump wants to consolidate the current seven brackets into three: 12%, 25%, and 33%. Income levels at which these different rates apply have not been specified but will probably follow the House Republican thresholds, which are:  0-$37,650, $37,650-$190,150, $190,150+. Trump would cap deductions at $100,000 for single filers, $200,000 for couples. The alternative minimum tax (AMT) would be repealed.


Clinton: Clinton would add a 4% surtax to existing personal income tax levels on income over $5 million, making the top individual income tax rate 43.6% - 47.7%. That rate includes the Net Investment Income Tax, which is an additional 3.8% tax on certain types of investment income, dividends, estates, and trusts that have income above statutory threshold amounts (a Medicare “surtax” or additional tax on investment income). Clinton also favors what has become known as “The Buffet Rule,” which is a minimum tax rate of 30% for incomes over $1 million. The names comes from investor Warren Buffett’s well known dissatisfaction with the fact that his secretary paid a higher rate than he did; that’s because his income came mostly from investment income which was taxed at a lower rate. Of course, another way to solve this injustice would be to lower the rate that his secretary pays!


WHAT’S IN PLAY – ESTATE TAXES:

Trump: Trump would like to eliminate the Estate Tax. There would be a 20% capital gains tax on unrealized capital gains of a decedent that are over $10 million.


Clinton: Clinton would increase the top estate tax rate from 40% to 45% and lower the estate tax exclusion from $5.45 million to $3.5 million.


WHAT’S IN PLAY – INVESTOR TAXES:

Trump: Currently tax rates on qualified dividends and capital gains held for over a year range from 0% to 23.8%, depending upon income (qualified dividends are those that meet certain criteria involving holding periods, puts, calls and short sales on the asset, etc.). Short-term capital gains, or gains on an asset held less than a year, are taxed at ordinary income tax rates, which are higher. Right now Trump’s plan pretty much leaves these the same.  Carried interest, which is a share of profits paid to investment partnership managing partners (i.e. private equity, hedge funds, real estate partnerships, etc.), is currently taxed at long-term capital gains tax rates. Under Trump’s plan, carried interest would be taxed at higher personal income rates rather than the current max long-term cap gains of 23.8%, which includes the 3.8% Medicare surtax (which Trump would like to eliminate).


Clinton: Clinton would raise rates on medium-term capital gains, which would be defined as investments held less than six years, to between 24% and 39.6%. Longer term capital gains and qualified dividend income would be taxed at a lower 24% rate, the idea being to reduce short-term trading.  Aforementioned carried interest would be taxed as ordinary income.


WHAT’S IN PLAY – CORPORATE TAXES:

Trump: Trump would cut corporate income tax rates from 35% to 15%. There would be a one-time repatriation tax of 10% on foreign income currently deferred (held overseas). This is lower than what corporations currently pay to bring cash held overseas into the US Trump’s plan to tax pass-through businesses (sole proprietorships, partnerships, and S corporations) at 15% rather than at higher current ordinary income tax rates was recently scrapped. Manufacturing firms (however defined) would enjoy 100% expensing of capital purchases rather than depreciating them over time. Basically, allowing expensing of capital purchases or investment spending lowers a company’s tax burden.


Clinton: Clinton hasn’t specified too much on taxes for large corporations but is apparently focused upon closing loopholes. For small businesses, Clinton advocates allowing immediate expensing of $1 million in capital investments and quadrupling the $10,000 deduction for start-up expenses. She also favors cash accounting over accrual accounting for businesses with less than $25 million in sales, which in effect is similar to full expensing of capital purchases.