President-elect Donald Trump calls for major tax reform

What will our tax system look like under a Donald Trump presidency?  Both the House Republicans and Trump Administration have outlined their proposed tax plans. Although there are slight differences between the two plans, they both aim to simplify the tax code and reduce taxes for all. Here are some of the major takeaways from the proposed reform.

Photo: Michael Vadon - Donald Trump, CC BY-SA 2.0, https://commons.wikimedia.org/w/index.php?curid=45496445
Photo by: Michael Vadon

For individuals, the Trump tax plan includes:

  • The number of individual tax brackets would be cut from the current amount of seven to three. The new rates would be 0%, 12%, 25%, and 33%, quite a bit lower than the current rates, with the highest current rate at 39.6%.
  • Taxes on long-term capital gains would remain the same at rates of 15% and 20%.
  • The 3.8 Net Investment Income Tax on interest, dividend, capital gains, and other investment income would be eliminated.
  • The Alternative Minimum Tax would be eliminated.
  • He would increase the standard deduction from $12,600 for Married Filing Joint taxpayers to $30,000. For those that itemize deductions (from home mortgage interest, charitable contributions, state deduction), this would likely not change if those itemized deductions exceed $30,000.
  • Personal exemptions would be eliminated. An above-the-line deduction for child care would be available for children under 13 for taxpayers making under $500,000 ($250,000 for Single).

The House proposal is aimed at simplifying tax reporting to the extent that most Americans would be able to submit their taxes on a 14-line postcard. In their blueprint, they follow similar recommendations as the Trump plan.

For businesses:

  • The corporate tax rate would lower from 35% to 15%.
  • The Alternative Minimum Tax would be eliminated.
  • He also proposes a repatriation of corporate profits held offshore at a one-time tax rate of 10%.
  • Firms involved in manufacturing would be given the option to immediately expense the cost of new assets in lieu of giving up the ability to deduct interest expense.
  • Many tax credits, other than the research credit, would be eliminated.

As with the individual change, this plan is intended to simplify the tax code applied to corporations. The House plan is slightly different, proposing a flat corporate tax of 20%, but it would also eliminate the Alternative Minimum Tax. In addition, the House plan would create a new top tax bracket of 25% for income generated from the active business of a sole proprietor or pass-through entity (s-corporations and partnerships).  This means that business income earned in an S-Corporation, partnership, or schedule C sole proprietor will no longer be taxed at the top marginal rates of the individual taxpayer.  This change could significantly lower taxes on your practice income for doctors in the top tax brackets who run their business as a pass-through entity.

Summary

At the heart of each plan is the effort to repeal the Affordable Care Act, eliminate the Alternative Minimum Tax system, lower tax rates for both businesses and individuals, and eliminate special interest deductions. Tax reform was touted as one of the cornerstones of President-elect Trump’s campaign platform; and given that both the House and Senate are controlled by a Republican majority there is a very high likelihood that we will see significant changes to the tax code. Nothing is for certain however, so it’s difficult to predict what these proposals will look like before consensus is met and they are put into law. After all, there are marked changes between these proposals and those presented during his campaign.

-David Knittel, CPA, Director of Tax at PracticeCFO

WordPress Image Lightbox