What do Michael Bloomberg, Arnold Schwarzenegger and Mitt Romney all have in common? When they held public office, each accepted only $1 in annual compensation. President Trump also has chosen to forgo his pay, donating his first-quarter salary – minus an amount for taxes – to the National Parks Service.1
Taxes were deducted from the donation due to IRS rules regarding donating income. According to the rules, if you accept income, you are generally responsible for the income taxes levied on it, regardless of the fact that you may then turn around and gift it. You may be able to claim the gift as a tax deduction, but the deduction is against the taxes owed on that income. President Obama worked around this rule by having the reward money for his Nobel Peace Prize paid out directly to charity so he bore no tax liability on those funds.2
Clearly, if you’re going to be generous with wages or assets, it takes considerable planning ahead to help minimize your tax liability. Indeed, the same goes for the federal estate tax on wealth valued at more than $5.49 million, to which one White House adviser allegedly remarked, “Only morons pay the estate tax.” In other words, those who are subject to the tax tend to deploy strategic plans to minimize or avoid it altogether.3
Perhaps proactive tax planning is one of the reasons revenues from the current 40 percent federal estate tax have been plummeting, dropping from $25 billion in 2008 to $17 billion in 2015.4 Then again, in 2008 the federal estate tax rate was higher (45 percent) and applied to a lower threshold ($2 million).5
As we move toward the end of 2017, tax reform is in focus for a couple of reasons. First, President Trump is working to make good on his campaign promise to cut taxes; that’s no small feat given the revenues needed to support ambitious infrastructure and military initiatives.
Second, as we approach year-end, it’s time to consider your income tax bill for 2017 and any strategies you can deploy to help minimize your taxable income. It’s a good idea to work with an experienced tax professional familiar with your unique needs and financial situation. Remember, when it comes to taxes, a strategic plan can make a significant difference. If your overall Financial Plan does not include a tax plan it should Give the team at Intelligence Driven Advisers a call, we can help.
Sources for this article:
1 Robert W. Wood. Forbes. April 4, 2017. “Trump Donates Presidential Pay, Reminding Us IRS Rules Apply to Everyone.” https://www.forbes.com/sites/robertwood/2017/04/04/trump-donates-presidential-pay-reminding-us-irs-rules-apply-to-everyone/#2400d9e02824 . Accessed Aug. 30, 2017.
3 Robert W. Wood. Forbes. Aug. 30, 2017. “Estate Tax Repeal Is Not Just For Morons.” https://www.forbes.com/sites/robertwood/2017/08/30/estate-tax-repeal-is-not-just-for-morons/#2cc8df70701b . Accessed Aug. 30, 2017.
4 Robert Frank. CNBC. Aug. 29, 2017. “‘Only morons pay the estate tax,’ says White House’s Gary Cohn.” https://www.cnbc.com/2017/08/29/only-morons-pay-the-estate-tax-says-white-houses-gary-cohn.html . Accessed Aug. 30, 2017.
5 Julie Garber. The Balance. June 8, 2017. “Exemption From Federal Estate Taxes: 1997-2017.” https://www.thebalance.com/exemption-from-federal-estate-taxes-3505630. Accessed Aug. 30, 2017