The Journal Fall 2016 Issue

The Journal Fall 2016 Issue

Comparison of Presidential Candidates’ Tax Plans

 

Presidential candidates Hillary Clinton and Donald Trump offer widely disparate views on topics ranging from immigration to gun control to national security. A similar gap exists in their respective tax proposals, with Clinton committed to raising taxes by $1.5 trillion over the next ten years, while Trump promises nearly $6 trillion in tax cuts over the same period.

Clinton would largely preserve the current tax system, with the overwhelming majority of proposed changes targeting the wealthiest 1% of taxpayers. Trump tax cuts would impact taxpayers at all income levels, with the biggest savings inuring to the wealthiest 1%.

What follows is a brief discussion highlighting key aspects of Clinton’s and Trump’s tax proposals.

Ordinary Income

Wages, interest income and income from self-employment are taxed at “ordinary income rates.” These rates are progressive; increasing as income rises. Under current law, there are seven tax brackets:

10% 15% 25% 28% 33% 35% 39.6%

Clinton would retain these seven brackets and add a 4% surcharge on income in excess of $5 million, bringing the top rate to 43.6%.

Trump would reduce the seven brackets to three rates of 12%, 25% and 33%. The top rate of 33% would apply to income more than $225,000 for married couples filing jointly; $112,500 for single filers.

Capital Gains

Gain from the sale of certain capital assets – such as corporate stock or your principal residence – held longer than one year is taxed at preferential rates. Under current law, these preferential rates reach a high of 20%.

Clinton would raise the top rate on capital gains to 24% for taxpayers with income in excess of $5 million. More notably, Clinton would require that a taxpayer in the highest income bracket hold a capital asset for six years before being entitled to the preferential 24% rate.

Trump would retain the current top rate on capital gains of 20%.

Obamacare Tax

As part of Obamacare, an additional 3.8% surtax is assessed on certain “net investment income” – i.e., interest, dividends, capital gains, and rental income – earned by taxpayers with income in excess of $250,000 if married; $200,000 if single. This surtax effectively increases the top rate under current law to 43.4% (39.6% + 3.8%).

Clinton would retain the 3.8% Obamacare tax; as a result, the top rate on ordinary income would rise to 47.4% (43.6% + 3.8%). The top rate on capital gains would also rise to 47.4%; should a taxpayer hold a capital asset for six years prior to selling, however, the top rate on such capital gains would be reduced to 27.8% (24% + 3.8%).

Trump would repeal Obamacare and any taxes that came with it, eliminating the 3.8% surtax on net investment income.

Itemized Deductions

All taxpayers are permitted to deduct certain itemized deductions – such as mortgage interest, medical expenses and charitable contributions – or a “standard deduction,” whichever is higher. Under current law, the standard deduction is $12,600 if married; $6,300 if single.

Clinton would retain the current standard deduction amounts. The itemized deductions of certain high-income taxpayers, however, would be limited to a 28% benefit. Thus, a taxpayer who earns $500,000 and is in the 39.6% bracket would effectively pay a tax of 11.6% (39.6% – 28%) on deductions such as mortgage interest. Trump would cap total itemized deductions at $200,000 for married taxpayers and $100,000 for single taxpayers.

Trump would also increase the standard deduction to $30,000 if married; $15,000 if single.

Child Care

The current law provides parents a host of tax incentives, including the child care, child tax and earned income credits. Clinton has proposed doubling the child tax credit from $1,000 to $2,000 for children under the age of five. Trump seeks to add three new incentives to the tax law: a limited deduction for child care costs, a refundable credit for low-income taxpayers, and the ability to deduct up to $2,000 in contributions made to a child care savings plan.

Estate Taxes

Under current law, if a taxpayer dies with an estate valued more than $5.45 million, the excess value is taxed at 40%. In addition, if a taxpayer’s assets are appreciated at the time of his or her death, no tax is assessed on the unrealized gain.

Clinton would reduce the estate tax exemption from $5.45 million to $3.5 million. The tax rate on estates in excess of this exemption would jump to 45%, with additional rates of 50% applied to estates worth over $10 million, 55% for estates over $50 million, and 65% for estates exceeding $500 million.

Trump would eliminate the estate tax, though he would require that any appreciation inherent in an estate’s assets be taxed at death when the estate is valued in excess of $10 million.

 

The information contained herein is not necessarily all inclusive, does not constitute legal or any other advice, and should not be relied upon without first consulting with appropriate qualified professionals.

Stock Market Predictions, Proposals and the Next President

It is our belief that there is no statistically significant correlation between stock market success and the winning party of a presidential election. Is this time different?

Well, actually, every time is different. The economic back drop, its growth potential, market valuations and investor sentiment have historically been determinants of stock prices, and they remain in constant flux. But what remains firmly in place are the checks and balances which limit presidential agendas and the ability for one person or party to materially influence future stock prices. Despite Donald Trump’s apparent affection for Putin, we are not Russia and there are limits to a president’s authority and influence, especially with respect to longer term stock market outcomes.

What history does tell us is that extremely poor or brazen Federal Reserve policy decisions can exacerbate stock market losses or create bubble-like stock gains, more often than not followed by equally spectacular subsequent losses. In 1929 the infamous stock market crash and an ill-fated decision by the Fed to tighten monetary policy helped launch the Great Depression. In contrast, the 2007 housing bubble and related 50% stock market correction has its roots in what many economists have described as extremely accommodative, laissez-faire Fed policy (2002 to 2006).

There is an argument to be made today, especially with a perceived ineffective Congress and lack of forthcoming fiscal policy, that it’s the appointed, but not elected, Fed governors that exert or are saddled with (depending on point of view) perhaps too much control on the economy. Yes, the seven Board of Governors of the Federal Reserve Board are appointed by the president. However, staggered 14 year terms and the need for Senate confirmation limit the influence any one president has over the process, once again checks and balances.

This is not to say presidential nominee agendas and policy are irrelevant and should be ignored. It may very well matter who wins with respect to income and estate tax planning, but it might not necessarily have a significant impact on the returns on your 401k and investment portfolio. Hillary Clinton wants millionaires to have an effective tax rate no less than 30%, the “Buffet Rule”. She also calls for a “Fair Share Surcharge” where those earning more than $5 million a year pay an additional 4%, bringing the top marginal tax rate up to 43.6%. Coupled with the existing Net Investment Income Tax of 3.8% on investment income for taxpayers whose modified adjusted income exceeds $200,000 $250,000 for couples, the total top rate would equate to 47.4% under her plan.

Donald Trump wants to condense tax brackets from seven to three; 12%, 25% and 33%, greatly reducing tax payments, especially on the wealthy. Smartly, neither candidate wants to alter the ever popular mortgage interest deduction. Hillary Clinton has suggested a declining graduated scale for tax rates on capital gains. The proposal is also meant to curb “activist” investors, some of which have garnered a reputation for putting their interests above existing shareholders. It should be noted when operating in a shareholder friendly manner activist investors serve a positive role in exerting pressure on overpaid, under-performing CEOs.

Similar to their income tax proposals, the respective estate tax plans of each candidate head in opposite directions. Trump would like to eliminate the “estate tax” which applies to inherited wealth but would limit stepped-up basis for estates at $10 million. Clinton would like to increase the “death tax” rate from 40 to 45% and lower the exempted amount from a current $5.45 million, $10.9 million for couples, to $3.5 million; $7 million for couples. The same theme emerges for corporate tax rates with Trump suggesting a 15% rate and a 10% tax on repatriated funds. Clinton has proposed no material change to a corporate rate deemed by many to be business unfriendly and globally noncompetitive. Keep in mind that any income or estate tax reform is a politically complex and challenging issue for Congress. It’s very likely that if we get a tax overhaul, the last one taking place in 1986, it will be a compromise of sorts.

Both candidates currently are against the TPP (Trans Pacific Partnership), but previously Clinton had endorsed the trade pact when she was Secretary of State. Fears, well founded or not, of hurting the middle class, outsourcing jobs to “sweatshops”, and being U.S. pharmaceutical unfriendly are enough for neither candidate to publicly endorse it in its current state.

Trump has finally acknowledged President Obama was born in the U.S.- as if that was ever really an issue. Las Vegas has set 3 to 2 odds that Trump will release his tax return information before Election day. Clinton struggles with her own unique set of problems, ranging from email servers to health related questions. If you are a long-term investor we believe it’s fair to wonder to what extent the nominees’ current proposals, promises, health and perceived character actually matter to the future returns of your portfolio.

However, we do believe there is a notable difference in this election. There is unquestionably a high level of distrust for the presidential nominees, a global dissatisfaction with current political systems and leaders, and a move toward nationalism. These factors, more than any presidential pledge or agenda item, could adversely increase stock market volatility. It’s our belief that market sentiment is one of the key drivers of stock market returns. A lack of conviction in our political process or incoming president could negatively impact stock prices in the short run, just as easily a decisive victory by either candidate could increase investor confidence. Although as of this writing the polls seem to be tightening which most likely equates to more, not less, short term market uncertainty.

We encourage all investors to have a solid investment plan and maintain a well diversified portfolio. We stand ready to be opportunistic should a stock price or asset class be marked down to a level deemed attractive. Keeping in mind that any price dislocations in the market place may prove temporary and in the long run economic fundamentals, not unpopular presidents, determine stock market outcomes. Our thoughts are not intended to be an endorsement of either party; rather a comparison of economic agendas and the sharing of an opinion, that in general, a president’s impact on future stock market returns is misunderstood and perhaps overrated.

 

 

Can An Accounting Firm Help With Cybersecurity

For an effective cybersecurity program, a business needs to coordinate efforts throughout its entire information system, all of which likely has an impact on the organization’s accounting function. As such, involving the accounting department as well as a CPA firm can be incredibly productive.

The most difficult challenge in cybersecurity is the ever-evolving nature of security risks themselves. As a result, national organizations are recommending more proactive and adaptive approaches to cybersecurity. The National Institute of Standards and Technology (“NIST”) recommends a shift toward detection, continuous monitoring and real-time assessments. The National Cyber Security Alliance (“NCSA”) recommends a top-down approach and focuses cyber-risk assessments on five key areas:

Identifying the most valuable information requiring protection.
Identifying threats and risks facing that information and their likelihood of occurrence.
Assessing impact on your business should data be compromised.
Assessing ability to recover from such an event.
Detecting nefarious activities (i.e. breach) on your network.

While specialized skills and in-depth knowledge of latest technologies and trends in cybersecurity can be critical, your accounting firm likely understands the nuances of your business, as well as the processes and controls in place regarding your assets. Your accounting firm can provide valuable information as you begin to address the activities above.

For years, accounting firms have been drafting management letter comments related to internal controls. Internal controls are not just about technology, they are also heavily rooted in people and process. The threat of a cyber event, or being hacked, expands the scope and significance of those internal controls as well as escalates the related risks if they are not working properly.

And what happens if your business is not as prepared as you think? Recently, a company experienced a cyber-attack only to find out that the cyber insurance claim was denied for failure to meet policy requirements around internal controls.

Security is only one piece of the puzzle. Assessing your ability to identify, protect, detect, respond and recover from a security incident and to take action to achieve your targeted level of readiness going forward is important to your bottom line. So yes, an accounting firm can help with cybersecurity. Do you know how prepared your organization really is?

Withum’s Cyber Secure Services Team

Withum has an experienced Cyber Secure Services team to support a company throughout the entire cyber secure ecosystem. Security is only one piece of the puzzle. We tailor our services to support you no matter what stage of the process you’re in, taking a comprehensive look at your organization, from measuring your level of preparedness to training your team on how to avoid an attack, ensuring your insurance policies are up-to-date with the appropriate coverage, and everything in between.

 

Withum Firm News

Withum Ranked Among Florida Trend’s Top 100 Best Companies List

Withum was recently named one of Florida’s Best Companies To Work For. The annual Best Companies list is featured in the August issue of Florida Trend magazine. One-hundred companies are ranked in small, medium and large employer categories.

Withum Adds Industry Expertise to Roster

Effective August 1, 2016, Fried & Kowgios Partners LLP (FK Partners), a New York City-based certified public accounting firm specializing in services to theatrical productions, not-for-profit and entertainment companies, joined its practice with Withum. Adding the Theatre Industry vertical to our firm’s roster of expertise is an exciting enhancement to our firm’s reach within the NYC business community.

In addition, McGuigan Tombs & Company, a certified public accounting firm based in Manasquan, NJ, also joined its practice with Withum. The firm has extensive experience servicing clients in the construction industry and related specialty contractor trades, and also provides services to a broad array of other industries within the region.

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