“Trump Reveals Outline for 2017 Tax Reform” by Paul Martin, CPA, MBA | Principal – Tax
President Trump has revealed his proposal for tax reform that is planned to be put in place in 2017. The outline released calls for simplification and drastic tax cuts for both individuals and businesses.
For individuals, the plan would lower individual tax rates and condense to only three tax brackets, double the standard deduction, eliminate the net investment income tax, eliminate the Alternative Minimum Tax (AMT), change itemized deductions, repeal the estate tax, and expand childcare and dependent incentives.
For businesses, the plan would reduce the corporate tax rate and change the tax treatment for pass-through entities.
Here is a high-level summary of each point:
The proposal would replace and reduce the current individual tax rates. The new, three-bracket structure would include: 10%, 25%, and 35%. The new brackets should reduce taxes for most individuals. The highest tax rate under current law is 39.6%. The income brackets have not yet been developed, so planning for the new rates is difficult until that is announced.
The standard deduction would nearly double with this proposal. Under current law, the standard deduction is $6,350 for single filers and $12,700 for married couples filing jointly. The proposal would increase the standard deduction for married couples filing jointly to $24,000 (and presumably to $12,000 for single filers). The goal here is to simplify tax filing for most taxpayers.
Net Investment Income Tax
Currently, the net investment income tax imposes a 3.8% tax on investment income for high income taxpayers. This was created under the Affordable Care Act and affects single filers with income over $200,000 and married couples filing jointly with income over $250,000. The proposal would eliminate this tax. The capital gains tax rate will remain the same at 20%. However, the elimination of the net investment income tax would effectively lower the capital gains tax rate for high income taxpayers from 23.8% to 20%.
Alternative Minimum Tax (AMT)
The proposal would eliminate AMT and help simplify tax filing. Since AMT is not indexed for inflation, it currently affects approximately 5 million taxpayers (compared to less than 1 million taxpayers when the legislation was passed). Basically, AMT requires taxpayers to calculate tax two different ways and then pay the higher amount. While AMT does generate significant revenue for the IRS, the impact may not be much since state and local income taxes will no longer be deductible under the proposal.
The proposed plan would keep in place tax breaks for charitable giving, mortgage interest, and retirement savings. As mentioned above, the new plan would eliminate the deduction for state and local income taxes. The other deductions that would be eliminated are medical expenses, real estate taxes, and other miscellaneous deductions (i.e. investment advisor fees). This would push more people to use the new, higher standard deduction.
Under President Trump’s proposal, the federal estate tax would be eliminated. The current federal estate tax rate is 40%. There is not any guidance on gift tax or the basis in inherited assets.
Childcare and Dependent Incentives
No specific details are mentioned in the proposal, but the plan does call for tax relief for families with child and dependent care expenses. During Trump’s campaign, many ideas were offered regarding various deductions and credits that could be implemented to provide the relief. However, no direction has been given yet on what additional deductions or credits would be available.
Corporate Tax Rate
The current maximum corporate (C corporation) tax rate is 35%. The proposal calls for a corporate tax rate of 15%. This item is one of the most aggressive and talked about in the entire proposal. While the current top tax rate is 35%, many corporations pay considerably less. President Trump has also said that the plan will eliminate certain tax breaks to help make up some of the difference in lost revenue to the IRS, but those tax breaks have not yet been specified.
With the large proposed change for C corporations, owners of S corporations and partnerships are asking “what about me and my company?” Under this proposal, the pass-through income from S corporations and partnerships would mirror that of C corporations with a 15% tax rate. The current top tax rate on this income is 39.6%. While there was not much detail in the proposal, Trump’s campaign indicated that S corporations and partnerships would be treated like C corporations with the tax rate structure. The new 15% tax would apply until assets are distributed from the company. Upon distribution, another layer of tax would be imposed similar to that of a C corporation and come out of the company as a qualified dividend. The details in the next several months regarding this topic will be very important for tax planning for 2017 and future years.
President Trump’s proposal will be heavily debated over the next several months before we see anything turn into actual legislation. Please stay tuned for updates that will be sent out that will affect you individually and your business.