“Trump Tax Policy Summary of Expected Changes” by Taylor Lorenz | Associate – Tax and Amy Smith, CPA | Manager – Tax
Now that the election is over and President-Elect Donald Trump is set to take the Oval Office on January 20, 2017, there figures to be substantial tax policy changes in the making. For the first time since 1928, Republicans control the White House and Congress, making the environment ripe for an overhaul to the national tax landscape. While the following is mostly speculation at this point, there are numerous initiatives that seem imminent under a Trump administration. The following is a summary of tax-related changes to expect, which on paper looks to be good news for individuals and small businesses.
Taxation of Individuals Under the Trump Tax Policy
The main premise of Trump’s tax plan is the lowering and simplification of tax rates. While the current tax structure includes 7 tax brackets with a top rate of 39.6%, Trump’s plan is to shrink this down to 3 tax brackets with a top rate of 33%. Overall, taxes would decrease by an average of $2,940 among all demographics, or roughly 4.1% of after-tax income. In addition to lower rates, the standard deduction would rise to $15,000 for single filers (currently $6,350), and $30,000 for married filing joint filers (currently $12,700). Under this plan, it is projected that the number of taxpayers who currently itemize will drop by 60%. This could provide a valuable tax benefit to many middle-class taxpayers, while also simplifying tax compliance in the process. Trump’s plan also champions tax benefits for childcare costs, making them deductible from adjusted gross income up to the average cost of care in the taxpayer’s home state.
The Trump Tax Policy is also advantageous to high-net worth individuals and families. With Republican control, the repeal of the Affordable Care Act (Obamacare) seems likely. This would include the elimination of the Net Investment Income tax, which is a 3.8% percent tax imposed on passive income for taxpayers with MAGI of $250,000 ($200,000 single). Another tax elimination on the horizon would be doing away with the alternative minimum tax (AMT). This would provide significant savings for high income-earning taxpayers who take advantage of various deductions, only to have them added back to this alternative tax base.
Elimination of the Federal Estate and Gift Tax
Arguably one of the most substantial policy shifts would be Trump’s tax policy to eliminate the federal estate and gift tax. In today’s current tax climate, estate tax is assessed at a rate of 40% on the portion above the unified estate and lifetime gift tax threshold of $5.49 million for an individual. Trump’s plan to eradicate the estate tax is welcome news for high net-worth families, and would keep substantial portions of wealth within the estate rather than into the hands of the government.
Trump Tax Policy – Taxation of Businesses
The top corporate income tax rate in the United States is currently at 35%, this ranks the U.S. as one of the highest taxing developed countries in the world. The Trump tax policy for businesses is to lower the corporate income tax rate to 15%, which would make U.S. companies much more competitive on the global landscape, while also encouraging U.S. companies to remain in the states.
What does this mean for small businesses? Trump has indicated that owners of pass-through entities (S-Corporations, Partnerships, and sole proprietorships) can elect to be taxed at a flat rate of 15% on pass-through income retained in the business. An additional layer of tax would be assessed on distributions, much like that of C corporation dividends. This is fantastic news for small business owners, as the current tax climate taxes pass-through income at ordinary rates (currently up to 39.6%). In addition to lower rates, several initiatives are also on the table to the advantage of the taxpayer. Section 179 allows the taxpayer to expense up to $500,000 of qualifying tangible property rather than having to capitalize these costs. Trump’s plan is to increase this limitation to $1 million, effectively incentivizing and allowing small business owners the opportunity to purchase equipment needed to maintain and grow operations. More good news comes specifically for manufacturing businesses. Trump has proposed that manufacturers can immediately deduct all new investments and purchases in the course of business. While this initiative is still a bit murky, as the deduction for interest expense would be disallowed, this could provide a tremendous opportunity for manufacturers to grow and expand business in a tax-friendly environment.
Potential Drawbacks for Small Businesses
One of the drawbacks for small businesses under the Trump tax policy would be the elimination of popular tax credits, such as the Domestic Production Activities Deduction (DPAD). The proposal states that all corporate tax credits would be gone, except for the Research & Development Credit. While this is bad news for taxpayers who currently take advantage of such credits, this is one necessary component needed in order to execute the substantially lower tax rates.
While the outline of Trump’s plan is mostly speculation and talking points for now, it is important to realize that some or all of these aforementioned tax policy initiatives could very well come to fruition. Although sweeping tax reforms have not occurred since 1986 under the Reagan administration, the environment is ripe for vast changes to happen once again. We realize that with major changes comes concern and questions about how this effects your personal and unique tax situation.
As 2016 comes to a close, some planning opportunities exist. With the possible decline in tax rates, deferring income to 2017, where possible, may result in a permanent tax break. With the potential for an increased standard deduction and lower tax rates, you may want to consider accelerating charitable contributions and other itemized deductions into the current year as they may provide you with a larger tax benefit now. Please contact your trusted AGP advisor to discuss how your situation may be changed, as well as opportunities to capitalize on these proposed initiatives.