Editor’s Note: With the conclusion of the conventions by both major political parties, the fall campaign is already underway. The nonpartisan Citizens For a Responsible Budget (CFRB) published a comprehensive review of tax proposals by the two major party candidates. While the election and the next Congress will also have major impact on any comprehensive 2017 tax reform bill, as an educational service to our readers your editor will publish this summary of proposals by the two major party candidates.

Tax Proposals from Hillary Clinton

The Clinton Campaign website emphasizes that she hopes to “close corporate tax loopholes” and make the “most fortunate” pay higher taxes. The increased revenue is to be used to assist the middle class with childcare, healthcare and college expenses.

1. Tax Deductions – For upper income taxpayers, the tax savings will be limited to the 28% bracket. For example, a taxpayer in the 39.6% federal bracket who deducts home mortgage interest would save at the 28% rate rather than the 39.6% rate. Charitable gifts will be excluded from this limitation. A taxpayer in the 39.6% bracket will receive the full benefit of his or her gift deductions.
2. Capital Gains Tax – Under the current system, short-term capital gain may be taxed at up to 39.6% plus the 3.8% Medicare tax, for a total tax rate of 43.4%. Capital assets held over one year have a top rate of 23.8%. The Clinton proposal changes holding period rules to require a full six year term for long-term capital gain status. The top rate of 43.4% would be paid on assets sold within two years. The rate would be gradually reduced between years two and six.
3. Minimum Tax – As has been proposed by businessman Warren Buffet, there is a 30% minimum tax on incomes over $2 million. In addition, those who earn over $5 million would face an additional 4% surtax on the excess amounts.
4. Estate Tax – The current $5.45 million estate exclusion amount would be reduced to $3.5 million. The 40% estate tax rate will be increased to 45%. There also are various limitations on valuation strategies and other methods for reducing estate tax.
5. Business Taxes – There will be higher taxes on the oil and gas industry. Some partnerships and other passthrough businesses would also have increased taxes. Banks with assets over $50 billion will make an additional payment each year.

Editor’s Note: The Clinton Campaign indicates that it would use some of the revenue to cover up to $2,500 in annual college costs. There also are discussions underway on reducing tuition at State Universities for taxpayers with incomes up to $125,000. A portion of the tax savings will also be used for childcare and healthcare benefits.

Tax Proposals from Donald Trump

The Trump Campaign proposes to lower marginal rates, reduce tax deductions and hopefully stimulate economic growth. House Ways and Means Committee Chairman Kevin Brady (R-TX) stated that he has been discussing tax reform with representatives from the Trump Campaign. Brady noted, “I feel like on the area of tax reform, and how we get the economy going, there’s a lot of common ground with Mr. Trump.”

1. Standard Deductions – The existing $6,300 deduction will be increased to $25,000 for an individual or $50,000 for a couple. With the large increase in the standard deduction, at least 50% of American workers will pay no federal income tax.
2. Individual Income Tax Rates – The Trump Campaign proposes three brackets of 10%, 20% or 25%. The Alternative Minimum Tax (AMT), estate tax and 3.8% Medicare tax will all be repealed.
3. Deductions – Reducing tax rates is accomplished through changing or eliminating many tax deductions. Persons in the 10% bracket would receive most of the current deductions. Those in the 20% bracket should benefit from about half of existing deductions. Deductions would be substantially limited for taxpayers in the 25% bracket.
4. Business Taxes – The top rate is reduced from the current 35% to 15%. This will require the elimination of most or all business tax deductions.

Editor’s Note: Chairman Brady has published a fairly detailed outline of his potential 2017 tax reform bill. He has stated that his plan is to produce a revenue-neutral reform under the dynamic scoring rules. The political challenge with all tax bills with lower rates is that there is a very substantial limitation on itemized deductions. Because all who will lose their favored deduction will strongly defend their position, there will be a lively debate both this fall and next year.

Michigan Foundations Seek IRS Guidance

Robert S. Collier, President & CEO of the Counsel of Michigan Foundations, sent a letter to the IRS requesting guidance for community foundations and their related nonprofits. He observes that many community foundations are now interested in working with other local nonprofits on economic development projects.

Collier specifically requests guidance for two types of proposed working relationships.

Many urban areas have sections of the city that are either blighted or deteriorated. It is in the interests of the city and all residents to encourage economic development. Donors may be willing to make gifts to community foundations that could be used for grants to small business owners. In order to make foundation grants, the IRS must publish rules and guidelines to clarify when those grants are permitted.

Another concern is the lack of broadband internet access in rural areas. The widespread use of the internet is now an important part of both personal and business life in rural areas. Community foundations may be open to making grants for some of the infrastructure necessary to provide broadband to the rural areas.

Collier expresses appreciation for IRS Notice 2015-62 with its guidelines for Program Related Investments (PRIs). However, he requests greater clarity from the IRS on the potential for economic development projects funded by community foundations.

Editor’s Note: There is clear benefit to communities when the blighted or deteriorated areas are developed. By encouraging the success of small businesses, cities will gain from employment, taxes and improvements in the surrounding neighborhoods. The challenge for the IRS and the community foundation is how to fit economic development within the traditional role for nonprofits of making grants to those in need. The IRS must be fairly specific in outlining what types of grants are permissible to small businesses and under what conditions they may be given. It will be important that the guidelines set forth thoughtful rules to make fair allocation of the grants. In any economic development area, some organizations tend to receive greater benefits from the government and others a lesser amount. Fairness is an ongoing challenge for both the IRS and community foundations.

Applicable Federal Rate of 1.4% for August—Rev. Rul. 2016-18; 2016-31 IRB 1 (17 July 2016)

The IRS has announced the Applicable Federal Rate (AFR) for August of 2016. The AFR under Section 7520 for the month of August will be 1.4%. The rates for July of 1.8% or June of 1.8% also may be used. The highest AFR is beneficial for charitable deductions of remainder interests. The lowest AFR is best for lead trusts and life estate reserved agreements. With a gift annuity, if the annuitant desires greater tax-free payments the lowest AFR is preferable. During 2016, pooled income funds in existence less than three tax years must use a 1.2% deemed rate of return. Federal rates are available by clicking here.