TAXES IN FLUX: WHAT YOU NEED TO KNOW ABOUT EVOLVING TRUMP TAX REFORM

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WHAT YOU NEED TO KNOW ABOUT EVOLVING TRUMP TAX REFORM

TAXES IN FLUX

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AS THE TRUMP ADMINISTRATION nears the end of its first full year in office, Republicans in the House and the Senate are gearing up for a major overhaul of the tax system. In April, the president released a one-page summary of his tax priorities, outlining broad goals for tax simplification and reductions. Late in September, the GOP’s Big Six Group — that is House Speaker Paul Ryan, Senate Majority Leader Mitch O’Connell, Treasury Secretary Steve Mnuchin, White House Advisor Gary Cohn, House Ways and Means Committee Chairman Kevin Brady, and Senate Finance Committee Chairman Orrin Hatch — expanded on this blueprint with a more detailed version of the plan.

TAXES IN FLUX: WHAT YOU NEED TO KNOW ABOUT EVOLVING TRUMP TAX REFORM

TAXES IN FLUX: WHAT YOU NEED TO KNOW ABOUT EVOLVING TRUMP TAX REFORM

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The new plan envisions dramatic cuts in corporate tax rates (to 25%), as well as a simpler individual tax code with fewer brackets, a larger exemption, and few individual tax deductions. One change already provoking howls of protest on both coasts is state and local income taxes would no longer be deductible. In another more welcome alteration, the alternative minimum tax would disappear. A vaguely worded intention to allow small businesses to benefit from lower “pass-through” rates (which top out at 25%) seems likely to set the most agilest in accounting to work on tax- reducing strategies. Good news for the truly wealthy — and the advisors who serve them — estate tax and generation-skipping tax will be phased out.

Yet while the broad outlines of the plan are now available, the details are not. No one knows where the three — and perhaps four — tax brackets will begin and end. The end of state and local tax deductibility is under fire and seems unlikely to survive the legislative process. Which businesses will be able to convert ordinary income into pass-through income is yet to be defined. With sharp divisions within the Republican legislatures and between the President and the House and Senate — and the failure of health care reform still stinging — it is hard to envision a smooth transition from position paper to tax law.

Waiting and seeing and not doing anything rashFor all these reasons, and even though tax overhaul may ultimately affect nearly every part of the investment and wealth planning industry, financial advisors and their clients should not move precipitously.

Bill Sweet, CFP, an investment advisor at Ritholtz Wealth Management, says that he has heard some questions from clients already about the change in brackets and pass-through income. “Mostly, people want to know how it will affect them — negatively or positively. It’s being sold and discussed as a broad tax cut across the board, but with any

“plan” (it’s really more like a broad wish-list, without much detail, the document circulated with the hysterical headline “Unified Framework for Fixing Our Broken Tax Code”) there are relative winners and losers with a sweeping change as outlined in the UFFOBTC,” he says. “For the most part, these questions are not answerable. We don’t know where the tax brackets start and end, for example. There’s not enough data in the proposal to analyze, thus it’s been a lot of speculation up to this point.”

TAXES IN FLUX: WHAT YOU NEED TO KNOW ABOUT EVOLVING TRUMP TAX REFORM

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“Most clients understand that it is far too uncertain at this point. There have been a few different variations of tax plans discussed by the new administration, none with much detail, and none speaking to how the decreased revenue would fit in terms of the broader federal budget,” says Carolyn Decker, CFP®, CPA, PFS, an owner and relationship manager at Lake Street Advisors in Portsmouth, NH. “While the new lower brackets ostensibly mean fewer taxes for most clients, the potential loss of some deductions could lessen the anticipated savings. Simply not enough details are known at this point.”

Making drastic changes now would be foolish says Nick Bertha, managing director and director of wealth and trust planning at New York City-based Fieldpoint Private. “I wouldn’t want to go out on a limb and do anything precipitous or radical until I knew what the rules were,” he says. “You can end up shooting yourself in the foot pretty easily by making some big and irreversible mistakes.”

Even if it is not yet time to take action, financial advisors and their clients should be aware of some of the changes under discussion. “At this point, it’s something to keep an eye on. You should pay attention. But you should sit tight,” says Brad MacMillan, chief investment officer at Commonwealth Financial Network, the nation’s largest privately held independent broker/ dealer–RIA. “At some point, there may be something to react to. But you shouldn’t worry because right now we’re not there.”

With that in mind, here are five major areas where tax reform may affect high net worth families and individuals.

Fewer brackets, lower ratesThe Big Six tax proposal envisions three main brackets taxed at 12%, 25%, and 35%. (Currently, there are seven tax brackets, starting at 10% and going up to 39.6%.) The proposal would increase the standard deduction to $24,000 for married couples and $12,000 for individuals, while at the same time, eliminating the standard deduction (as well as itemized deductions except for home mortgage and charitable deductions). There would also be no alternative minimum tax.

That structure would significantly simplify individual tax calculations, which McMillan says would be basically a positive development if it were ever allowed to happen. “In general, the simpler and more transparent a tax system, the fewer distortions it introduces, the better off we are. I would love to see an absolutely simple tax system,” he says. “The problem is that abandons the government’s ability to enact policy objectives through the tax system. And the government has historically been very unwilling to give that up. I don’t actually see the tax system getting much simpler if at all.”

That is because some of these tax deductions are extremely popular. Ritholtz’s Sweet thinks that “State and local tax deductions are going to be a show stopper for representatives from New York, New Jersey, California, Minnesota, Oregon, Iowa, Wisconsin to name a few. The real estate industry is likely to lobby hard to keep both business interest deductions in at the corporate level, as well as real estate tax deductions in for individuals.”

Form 1040 (2016)

Page 2

Tax and Credits

38 Amount from line 37 (adjusted gross income) . . . . . . . . . . . . . . 38

39a Check if: { You were born before January 2, 1952,

Blind.

Spouse was born before January 2, 1952, Blind. } Total boxes checked ▶ 39a

b If your spouse itemizes on a separate return or you were a dual-status alien, check here ▶ 39b

Standard Deduction for— • People who check any box on line 39a or 39b or who can be claimed as a dependent, see

instructions. • All others: Single or Married filing separately, $6,300 Married filing jointly or Qualifying widow(er), $12,600

Head of household, $9,300

40 Itemized deductions (from Schedule A) or your standard deduction (see left margin) . . 40

41 Subtract line 40 from line 38 . . . . . . . . . . . . . . . . . . . 41

42 Exemptions. If line 38 is $155,650 or less, multiply $4,050 by the number on line 6d. Otherwise, see instructions 42

43 Taxable income. Subtract line 42 from line 41. If line 42 is more than line 41, enter -0- . . 43

44 Tax (see instructions). Check if any from: a Form(s) 8814 b Form 4972 c44

45 Alternative minimum tax (see instructions). Attach Form 6251 . . . . . . . . . 45

46 Excess advance premium tax credit repayment. Attach Form 8962 . . . . . . . . 46

47 Add lines 44, 45, and 46 . . . . . . . . . . . . . . . . . . . ▶ 47

48 Foreign tax credit. Attach Form 1116 if required . . . . 48

49 Credit for child and dependent care expenses. Attach Form 2441 49

50 Education credits from Form 8863, line 19 . . . . . 50

51 Retirement savings contributions credit. Attach Form 8880 51

52 Child tax credit. Attach Schedule 8812, if required . . . 52

53 Residential energy credits. Attach Form 5695 . . . . 53

54 Other credits from Form: a 3800 b 8801 c 54

55 Add lines 48 through 54. These are your total credits . . . . . . . . . . . . 55

56 Subtract line 55 from line 47. If line 55 is more than line 47, enter -0- . . . . . . ▶ 56

Other Taxes

57 Self-employment tax. Attach Schedule SE . . . . . . . . . . . . . . . 57

58 Unreported social security and Medicare tax from Form: a 4137 b 8919 . . 58

59 Additional tax on IRAs, other qualified retirement plans, etc. Attach Form 5329 if required . . 59

60 a Household employment taxes from Schedule H . . . . . . . . . . . . . . 60a

b First-time homebuyer credit repayment. Attach Form 5405 if required . . . . . . . . 60b

61 Health care: individual responsibility (see instructions) Full-year coverage . . . . . 61

62 Taxes from: a Form 8959 b Form 8960 c Instructions; enter code(s)62

63 Add lines 56 through 62. This is your total tax . . . . . . . . . . . . . ▶ 63

Payments 64 Federal income tax withheld from Forms W-2 and 1099 . . 64

65 2016 estimated tax payments and amount applied from 2015 return 65

If you have a qualifying child, attach Schedule EIC.

66a Earned income credit (EIC) . . . . . . . . . . 66a

b Nontaxable combat pay election 66b

67 Additional child tax credit. Attach Schedule 8812 . . . . . 67

68 American opportunity credit from Form 8863, line 8 . . . 68

69 Net premium tax credit. Attach Form 8962 . . . . . . 69

70 Amount paid with request for extension to file . . . . . 70

71 Excess social security and tier 1 RRTA tax withheld . . . . 71

72 Credit for federal tax on fuels. Attach Form 4136 . . . . 72

73 Credits from Form: a 2439 b Reserved c 8885 d 73

74 Add lines 64, 65, 66a, and 67 through 73. These are your total payments . . . . . ▶ 74

Refund

Direct deposit? See instructions.

75 If line 74 is more than line 63, subtract line 63 from line 74. This is the amount you overpaid 75

76a Amount of line 75 you want refunded to you. If Form 8888 is attached, check here . ▶76a

▶

▶

b Routing number

▶ c Type: Checking Savings

d Account number77 Amount of line 75 you want applied to your 2017 estimated tax ▶ 77

Amount You Owe 78 Amount you owe. Subtract line 74 from line 63. For details on how to pay, see instructions ▶ 78

79 Estimated tax penalty (see instructions) . . . . . . . 79

Third Party Designee Do you want to allow another person to discuss this return with the IRS (see instructions)?

Yes. Complete below. No

Designee’s name ▶

Phone no. ▶

Personal identification number (PIN) ▶

Sign Here Joint return? See instructions. Keep a copy for your records.

Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and

accurately list all amounts and sources of income I received during the tax year. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge.

Your signature

Date Your occupation

Daytime phone number

Spouse’s signature. If a joint return, both must sign. Date

▲

Spouse’s occupation

If the IRS sent you an Identity Protection PIN, enter it here (see inst.)

Paid Preparer Use Only

Print/Type preparer’s name Preparer’s signature

Date

Check if self-employed

PTIN

Firm’s name ▶Firm’s address ▶

Firm’s EIN ▶Phone no.

www.irs.gov/form1040

Form 1040 (2016)

Form 1040 Department of the Treasury—Internal Revenue Service (99)

U.S. Individual Income Tax Return 2016 OMB No. 1545-0074 IRS Use Only—Do not write or staple in this space.

For the year Jan. 1–Dec. 31, 2016, or other tax year beginning , 2016, ending

, 20 See separate instructions.

Your first name and initial Last name

Your social security number

If a joint return, spouse’s first name and initial Last name

Spouse’s social security number

▲ Make sure the SSN(s) above

and on line 6c are correct.

Home address (number and street). If you have a P.O. box, see instructions.

Apt. no.

City, town or post office, state, and ZIP code. If you have a foreign address, also complete spaces below (see instructions).

Foreign country name

Foreign province/state/county Foreign postal code

Presidential Election Campaign

Check here if you, or your spouse if filing

jointly, want $3 to go to this fund. Checking

a box below will not change your tax or

refund. You Spouse

Filing Status

Check only one

box.

1 Single

2 Married filing jointly (even if only one had income)

3 Married filing separately. Enter spouse’s SSN above

and full name here. ▶

4 Head of household (with qualifying person). (See instructions.) If

the qualifying person is a child but not your dependent, enter this

child’s name here. ▶

5 Qualifying widow(er) with dependent child

Exemptions 6a Yourself. If someone can claim you as a dependent, do not check box 6a . . . . .

b Spouse . . . . . . . . . . . . . . . . . . . . . . . .}

c Dependents:

(1) First name Last name

(2) Dependent’s

social security number

(3) Dependent’s

relationship to you

(4) ✓ if child under age 17

qualifying for child tax credit

(see instructions)

If more than four

dependents, see

instructions and

check here ▶d Total number of exemptions claimed . . . . . . . . . . . . . . . . .

Boxes checked

on 6a and 6b

No. of children

on 6c who: • lived with you

• did not live with

you due to divorce

or separation

(see instructions)

Dependents on 6c

not entered above

Add numbers on

lines above ▶

Income

Attach Form(s)

W-2 here. Also

attach Forms

W-2G and

1099-R if tax

was withheld.

If you did not

get a W-2,

see instructions.

7 Wages, salaries, tips, etc. Attach Form(s) W-2 . . . . . . . . . . . . 7

8a Taxable interest. Attach Schedule B if required . . . . . . . . . . . . 8a

b Tax-exempt interest. Do not include on line 8a . . . 8b

9 a Ordinary dividends. Attach Schedule B if required . . . . . . . . . . . 9a

b Qualified dividends . . . . . . . . . . . 9b

10 Taxable refunds, credits, or offsets of state and local income taxes . . . . . . 10

11 Alimony received . . . . . . . . . . . . . . . . . . . . . 11

12 Business income or (loss). Attach Schedule C or C-EZ . . . . . . . . . . 12

13 Capital gain or (loss). Attach Schedule D if required. If not required, check here ▶ 13

14 Other gains or (losses). Attach Form 4797 . . . . . . . . . . . . . . 14

15 a IRA distributions . 15a b Taxable amount . . . 15b

16 a Pensions and annuities 16a b Taxable amount . . . 16b

17 Rental real estate, royalties, partnerships, S corporations, trusts, etc. Attach Schedule E 17

18 Farm income or (loss). Attach Schedule F . . . . . . . . . . . . . . 18

19 Unemployment compensation . . . . . . . . . . . . . . . . . 19

20 a Social security benefits 20a b Taxable amount . . . 20b

21 Other income. List type and amount

21

22 Combine the amounts in the far right column for lines 7 through 21. This is your total income ▶ 22

Adjusted Gross Income

23 Educator expenses . . . . . . . . . . . 23

24 Certain business expenses of reservists, performing artists, and

fee-basis government officials. Attach Form 2106 or 2106-EZ 24

25 Health savings account deduction. Attach Form 8889 . 25

26 Moving expenses. Attach Form 3903 . . . . . . 26

27 Deductible part of self-employment tax. Attach Schedule SE . 27

28 Self-employed SEP, SIMPLE, and qualified plans . . 28

29 Self-employed health insurance deduction . . . . 29

30 Penalty on early withdrawal of savings . . . . . . 30

31 a Alimony paid b Recipient’s SSN ▶31a

32 IRA deduction . . . . . . . . . . . . . 32

33 Student loan interest deduction . . . . . . . . 33

34 Tuition and fees. Attach Form 8917 . . . . . . . 34

35 Domestic production activities deduction. Attach Form 8903 35

36 Add lines 23 through 35 . . . . . . . . . . . . . . . . . . . 36

37 Subtract line 36 from line 22. This is your adjusted gross income . . . . . ▶ 37

For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see separate instructions. Cat. No. 11320B Form 1040 (2016) THE BIG SIX

TAX PROPOSAL ENVISIONS THREE MAIN BRACKETS TAXED AT 12%, 25%, AND 35%

TAXES IN FLUX: WHAT YOU NEED TO KNOW ABOUT EVOLVING TRUMP TAX REFORM

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Bertha’s firm, located in New York City, serves a wide swath of customers with high state and local taxes. “If it did pass and there was no state and local income tax deduction, a lot of people’s tax bill would go up because of the deduction going away,” he says. However, he explains, many of these people now have to pay alternative minimum tax. “It really becomes a flat tax with fewer marginal rates and less deductions.”

He adds, “The other fear is that there’s that kind of hidden ‘ghost bracket’ in there. The exact quote is ‘an additional top rate may apply to the highest income payers.’ That’s a definite possibility.”

However, this ghost bracket, like all the others, is so far undefined. That makes tax planning extremely difficult. Should you delay income into 2018 to take advantage of lower rates? No way to say. Should you realize capital gains this year or next? Not a clue. Should you make a large charitable contribution now or wait until the New Year? Impossible to say. Even if Congress manages to ram through a tax bill this year, or more likely next, there is no way to tell what its final shape will be or to identify clear winners and losers.

The pass-through conundrumOne provision that might shape tax and financial planning considerably concerns business income from small and family-owned businesses structured as sole proprietorships, partnerships, and S corporations. Their income, per the Big Six summary, would be taxed at a maximum rate of 25%. However, the authors caution that it will not be so easy to recharacterize personal income as business income, though they do not specify exactly how they will make it difficult.

The proposal is similar to tax policies enacted in Kansas in 2012, which resulted in a massive movement to reclassify personal income as pass-through business income, reducing tax revenues by an estimated $700 million (or eight percent of the total) from 2013 to 2016.

TAXES IN FLUX: WHAT YOU NEED TO KNOW ABOUT EVOLVING TRUMP TAX REFORM

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Bill Sweet says that the pass-through provision may be the most interesting — and maddeningly vague— element in the whole proposal. “The differential between the proposed pass-through rate of 25% and the highest marginal individual rate of 35% is significant and tantalizing. Yet the proposal warns that ‘committees will adopt measures to prevent recharacterization of personal income into business income,’he says. “We have no clue what this means – after all, business income is personal income for your local barber or hedge fund manager, at the end of the day.”

Sweet adds that Treasury Secretary Steve Mnuchin has said in interviews that pass-through income will primarily be applicable to businesses that create manufacturing jobs. Still, the way that the rule is written will determine the provision’s scope and reach, and that, so far, is still conjecture. “How the government chooses to draw the line is anyone’s guess outside of the unfortunate and incorrect conclusion that accountants don’t create jobs,” Sweet quips.

Decker is also urging her clients to be cautious. “If the rate on pass-through income does get passed to be much lower than the top brackets, we would agree that many of the pass-through income generators would likely try to re-classify income to fit that bucket,” she says. “The planning for it though is challenging since you may not know the investment manager’s position until a K-1 is issued, so in the short run, we would suggest being conservative and assuming higher rates to avoid surprises or penalties/interest from underpaying based on an assumption that pass through income may be taxed at a lower rate.”

Bertha, too, scoffs at the notion of America’s wealthy being able to suddenly reclassify themselves as business owners. “They’re not going to let people go from 39.6% to 25% just because they’ve created an LLC or Sub S. That isn’t going to happen,” he says. “It’s going to be very restrictive and very definitive and likely it’s going to be restricted to…maybe, not manufacturers, but it will certainly not affect big law firms and big asset management firms.”

Whither estate taxes?The most significant change, from a wealth planning perspective, is the complete elimination of the estate tax. If that part of reform were to be enacted what, exactly, would become of estate planning.

Ritholtz’s Sweet believes that wealthy families would still require planning services. “To begin, estate taxes will likely remain in place at most states that impose an estate tax at the state level. Currently, 20 do. Given that most state exemptions are at $1 - $2 million, estate tax planning for the purposes of minimizing estate and inheritance taxes will likely be important for wealthy investors even if estate taxes are repealed at the federal level,” he says. (Though, to be fair, Bertha believes that the repeal of federal estate tax might cause some states to get rid of their own estate taxes.)

And beyond that, large estates must be managed, even if they are not subject to estate taxes. “There is a lot of responsibility and diligence necessary for managing an asset base of that size. For example, a wealthy client who built his or her business and sold it might want to restrict the use of their wealth in current and future generations by creating trusts that distribute assets only for college tuition or other goals, allowing for their legacy to live beyond their own lifespan,” Sweet ventures.

Form 1040 (2016)

Page 2

Tax and Credits

38 Amount from line 37 (adjusted gross income) . . . . . . . . . . . . . . 38

39a Check if: { You were born before January 2, 1952,

Blind.

Spouse was born before January 2, 1952, Blind. } Total boxes checked ▶ 39a

b If your spouse itemizes on a separate return or you were a dual-status alien, check here ▶ 39b

Standard Deduction for— • People who check any box on line 39a or 39b or who can be claimed as a dependent, see

instructions. • All others: Single or Married filing separately, $6,300 Married filing jointly or Qualifying widow(er), $12,600

Head of household, $9,300

40 Itemized deductions (from Schedule A) or your standard deduction (see left margin) . . 40

41 Subtract line 40 from line 38 . . . . . . . . . . . . . . . . . . . 41

42 Exemptions. If line 38 is $155,650 or less, multiply $4,050 by the number on line 6d. Otherwise, see instructions 42

43 Taxable income. Subtract line 42 from line 41. If line 42 is more than line 41, enter -0- . . 43

44 Tax (see instructions). Check if any from: a Form(s) 8814 b Form 4972 c44

45 Alternative minimum tax (see instructions). Attach Form 6251 . . . . . . . . . 45

46 Excess advance premium tax credit repayment. Attach Form 8962 . . . . . . . . 46

47 Add lines 44, 45, and 46 . . . . . . . . . . . . . . . . . . . ▶ 47

48 Foreign tax credit. Attach Form 1116 if required . . . . 48

49 Credit for child and dependent care expenses. Attach Form 2441 49

50 Education credits from Form 8863, line 19 . . . . . 50

51 Retirement savings contributions credit. Attach Form 8880 51

52 Child tax credit. Attach Schedule 8812, if required . . . 52

53 Residential energy credits. Attach Form 5695 . . . . 53

54 Other credits from Form: a 3800 b 8801 c 54

55 Add lines 48 through 54. These are your total credits . . . . . . . . . . . . 55

56 Subtract line 55 from line 47. If line 55 is more than line 47, enter -0- . . . . . . ▶ 56

Other Taxes

57 Self-employment tax. Attach Schedule SE . . . . . . . . . . . . . . . 57

58 Unreported social security and Medicare tax from Form: a 4137 b 8919 . . 58

59 Additional tax on IRAs, other qualified retirement plans, etc. Attach Form 5329 if required . . 59

60 a Household employment taxes from Schedule H . . . . . . . . . . . . . . 60a

b First-time homebuyer credit repayment. Attach Form 5405 if required . . . . . . . . 60b

61 Health care: individual responsibility (see instructions) Full-year coverage . . . . . 61

62 Taxes from: a Form 8959 b Form 8960 c Instructions; enter code(s)62

63 Add lines 56 through 62. This is your total tax . . . . . . . . . . . . . ▶ 63

Payments 64 Federal income tax withheld from Forms W-2 and 1099 . . 64

65 2016 estimated tax payments and amount applied from 2015 return 65

If you have a qualifying child, attach Schedule EIC.

66a Earned income credit (EIC) . . . . . . . . . . 66a

b Nontaxable combat pay election 66b

67 Additional child tax credit. Attach Schedule 8812 . . . . . 67

68 American opportunity credit from Form 8863, line 8 . . . 68

69 Net premium tax credit. Attach Form 8962 . . . . . . 69

70 Amount paid with request for extension to file . . . . . 70

71 Excess social security and tier 1 RRTA tax withheld . . . . 71

72 Credit for federal tax on fuels. Attach Form 4136 . . . . 72

73 Credits from Form: a 2439 b Reserved c 8885 d 73

74 Add lines 64, 65, 66a, and 67 through 73. These are your total payments . . . . . ▶ 74

Refund

Direct deposit? See instructions.

75 If line 74 is more than line 63, subtract line 63 from line 74. This is the amount you overpaid 75

76a Amount of line 75 you want refunded to you. If Form 8888 is attached, check here . ▶76a

▶

▶

b Routing number

▶ c Type: Checking Savings

d Account number77 Amount of line 75 you want applied to your 2017 estimated tax ▶ 77

Amount You Owe 78 Amount you owe. Subtract line 74 from line 63. For details on how to pay, see instructions ▶ 78

79 Estimated tax penalty (see instructions) . . . . . . . 79

Third Party Designee Do you want to allow another person to discuss this return with the IRS (see instructions)?

Yes. Complete below. No

Designee’s name ▶

Phone no. ▶

Personal identification number (PIN) ▶

Sign Here Joint return? See instructions. Keep a copy for your records.

Under penalties of perjury, I declare that I have examined this return and accompanying schedules and statements, and to the best of my knowledge and belief, they are true, correct, and

accurately list all amounts and sources of income I received during the tax year. Declaration of preparer (other than taxpayer) is based on all information of which preparer has any knowledge.

Your signature

Date Your occupation

Daytime phone number

Spouse’s signature. If a joint return, both must sign. Date

▲

Spouse’s occupation

If the IRS sent you an Identity Protection PIN, enter it here (see inst.)

Paid Preparer Use Only

Print/Type preparer’s name Preparer’s signature

Date

Check if self-employed

PTIN

Firm’s name ▶Firm’s address ▶

Firm’s EIN ▶Phone no.

www.irs.gov/form1040

Form 1040 (2016)

Form 1040 Department of the Treasury—Internal Revenue Service (99)

U.S. Individual Income Tax Return 2016 OMB No. 1545-0074 IRS Use Only—Do not write or staple in this space.

For the year Jan. 1–Dec. 31, 2016, or other tax year beginning , 2016, ending

, 20 See separate instructions.

Your first name and initial Last name

Your social security number

If a joint return, spouse’s first name and initial Last name

Spouse’s social security number

▲ Make sure the SSN(s) above

and on line 6c are correct.

Home address (number and street). If you have a P.O. box, see instructions.

Apt. no.

City, town or post office, state, and ZIP code. If you have a foreign address, also complete spaces below (see instructions).

Foreign country name

Foreign province/state/county Foreign postal code

Presidential Election Campaign

Check here if you, or your spouse if filing

jointly, want $3 to go to this fund. Checking

a box below will not change your tax or

refund. You Spouse

Filing Status

Check only one

box.

1 Single

2 Married filing jointly (even if only one had income)

3 Married filing separately. Enter spouse’s SSN above

and full name here. ▶

4 Head of household (with qualifying person). (See instructions.) If

the qualifying person is a child but not your dependent, enter this

child’s name here. ▶

5 Qualifying widow(er) with dependent child

Exemptions 6a Yourself. If someone can claim you as a dependent, do not check box 6a . . . . .

b Spouse . . . . . . . . . . . . . . . . . . . . . . . .}

c Dependents:

(1) First name Last name

(2) Dependent’s

social security number

(3) Dependent’s

relationship to you

(4) ✓ if child under age 17

qualifying for child tax credit

(see instructions)

If more than four

dependents, see

instructions and

check here ▶d Total number of exemptions claimed . . . . . . . . . . . . . . . . .

Boxes checked

on 6a and 6b

No. of children

on 6c who: • lived with you

• did not live with

you due to divorce

or separation

(see instructions)

Dependents on 6c

not entered above

Add numbers on

lines above ▶

Income

Attach Form(s)

W-2 here. Also

attach Forms

W-2G and

1099-R if tax

was withheld.

If you did not

get a W-2,

see instructions.

7 Wages, salaries, tips, etc. Attach Form(s) W-2 . . . . . . . . . . . . 7

8a Taxable interest. Attach Schedule B if required . . . . . . . . . . . . 8a

b Tax-exempt interest. Do not include on line 8a . . . 8b

9 a Ordinary dividends. Attach Schedule B if required . . . . . . . . . . . 9a

b Qualified dividends . . . . . . . . . . . 9b

10 Taxable refunds, credits, or offsets of state and local income taxes . . . . . . 10

11 Alimony received . . . . . . . . . . . . . . . . . . . . . 11

12 Business income or (loss). Attach Schedule C or C-EZ . . . . . . . . . . 12

13 Capital gain or (loss). Attach Schedule D if required. If not required, check here ▶ 13

14 Other gains or (losses). Attach Form 4797 . . . . . . . . . . . . . . 14

15 a IRA distributions . 15a b Taxable amount . . . 15b

16 a Pensions and annuities 16a b Taxable amount . . . 16b

17 Rental real estate, royalties, partnerships, S corporations, trusts, etc. Attach Schedule E 17

18 Farm income or (loss). Attach Schedule F . . . . . . . . . . . . . . 18

19 Unemployment compensation . . . . . . . . . . . . . . . . . 19

20 a Social security benefits 20a b Taxable amount . . . 20b

21 Other income. List type and amount

21

22 Combine the amounts in the far right column for lines 7 through 21. This is your total income ▶ 22

Adjusted Gross Income

23 Educator expenses . . . . . . . . . . . 23

24 Certain business expenses of reservists, performing artists, and

fee-basis government officials. Attach Form 2106 or 2106-EZ 24

25 Health savings account deduction. Attach Form 8889 . 25

26 Moving expenses. Attach Form 3903 . . . . . . 26

27 Deductible part of self-employment tax. Attach Schedule SE . 27

28 Self-employed SEP, SIMPLE, and qualified plans . . 28

29 Self-employed health insurance deduction . . . . 29

30 Penalty on early withdrawal of savings . . . . . . 30

31 a Alimony paid b Recipient’s SSN ▶31a

32 IRA deduction . . . . . . . . . . . . . 32

33 Student loan interest deduction . . . . . . . . 33

34 Tuition and fees. Attach Form 8917 . . . . . . . 34

35 Domestic production activities deduction. Attach Form 8903 35

36 Add lines 23 through 35 . . . . . . . . . . . . . . . . . . . 36

37 Subtract line 36 from line 22. This is your adjusted gross income . . . . . ▶ 37

For Disclosure, Privacy Act, and Paperwork Reduction Act Notice, see separate instructions. Cat. No. 11320B Form 1040 (2016) THE DIFFERENTIAL

BETWEEN THE PROPOSED

PASS-THROUGH RATE OF 25% AND THE

HIGHEST MARGINAL INDIVIDUAL RATE OF 35% IS SIGNIFICANTAND TANTALIZING.

TAXES IN FLUX: WHAT YOU NEED TO KNOW ABOUT EVOLVING TRUMP TAX REFORM

7

Bertha cautions that even if the GOP gets rid of the estate tax in 2018 (or 2017, or whenever they manage to pass legislation), there is no guarantee that the next Democratic-majority government will not start it right back up again. So the question becomes, what do you do with a window of time, maybe one or two years, maybe more, when there is no estate tax?

While individuals with dynasty trusts might have the option to decant these trusts into other structures to loosen restrictions on asset use, they also might consider protecting even more assets.

“One thing we’re actually talking to people about is let’s say that there is no estate tax next year and no gift tax which is a key component of that, and you were visionary enough to see that this is not going to last. You could put a lot of assets into a dynasty trust,” says Bertha. “There’s no tax dimension going in because there’s no gift tax and no estate tax. And there’s no limit on it because there’s no estate tax. And when the sheriff comes back into town, you really have protected these assets in perpetuity.”

Corporate taxes and the stock marketExperts agree that a reduction in corporate taxes is the most likely element of Trump’s plan to eventually pass, even if it cannot be offset with additional revenues.

McMillan puts the chances of the Big Six proposal — or something like it— passing next year at about 25%. “The only reason I say that is because right now Republicans have a serious political need to get something done,” he explains, noting the base and donor’s anger that a unified government couldn’t pass health care reform. “But that said, what is far

more likely to happen are modest cuts in tax rates and no other significant changes. That would be the minimum condition where Republicans could declare victory. So I think certainly cutting tax rates is easy. Actually reforming the system is hard. So I think they’ll end up defaulting to the easy option so they can say they’ve done something.”

Corporate tax cuts, says McMillan, will likely be good for the financial markets. “First of all it will materially help earnings growth and that’s a good thing. It would help make current valuations more reasonable. And because of that, I think there’s a real potential bump there. I don’t think it’s baked into the markets right now because I don’t think the markets really expect it to happen.”

He adds, “The markets largely rallied after the election on the expectation that things would happen. I think the air has largely gone out of that balloon. The improvements we’ve seen since then have been more about fundamentals, economics, earnings than about policy action, and I think the markets are pretty much in a ‘show me’ state. The good thing is that if it does happen, that would be a real upside surprise and that could be positive.”

Decker warns, however, that no one should be investing their portfolios on the expectation of a stock market bump that may never happen. “Advisors should be building or maintaining diversified portfolios designed to meet their clients’ long-term objectives. In the near term, there is a risk to the downside if corporate tax reform stalls or fails, but only if its success is already priced into the market. This is not easy to estimate and there is a host of other factors that could affect short-term market movements,” she says.

TAXES IN FLUX: WHAT YOU NEED TO KNOW ABOUT EVOLVING TRUMP TAX REFORM

8

YOUR PARTNER IN CHANGING INVESTMENT MARKETS Tax reform, if and when it is enacted, may have a profound impact on the investment markets and the practice of wealth planning. As the administration, the House and Senate work to refine their tax proposals, we can expect the landscape to continue to shift. To navigate this changing environment, you need a partner to guide you through the details of estate planning and protecting your clients’ assets. Premier Trust can be that partner.

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She also notes that over the long term, changes in corporate tax rates have not moved the market significantly. “From 1936 to 1969, the S&P 500 had an annualized return of 10.6%. During this time the corporate tax rate rose from 15% to 52.8%, according to taxpolicycenter.org. From 1970 to 2016 the corporate tax rate fell from 52.8% to 35% and the S&P 500 returns 10.3%, annualized,” she explained.

Hold tight for nowFor now, all the experts agree that there are little investors can do to benefit from tax reform — and indeed, any sudden shifts now, before the legislation has been

written, before it has been passed and before it has been enacted into law, would be premature. “Say you have a client with a $20 million estate, who needs to do some estate planning right now and hasn’t, and they say, well, you know, there’s a repeal provision in the proposals so let’s not do anything until we know. Well that’s a mistake,” says Bertha. “You also might get hit by a truck tomorrow. Until you know what the rules are going to be, you shouldn’t be making major decisions in your life.”