Much has been written and said recently about what the future may hold under President-elect Donald Trump. Whatever your political views are, change is one constant that we all face. While no one knows for sure what changes may occur, we want to provide you with information based on the President-elect’s current proposals that could influence your year-end tax planning.
Working with Congress
When the 115th Congress convenes in January 2017, it will find the GOP in control of both the House and Senate, therefore allowing Trump to move forward on his proposals more easily. It remains to be seen, however, what compromises will be necessary between Congress and the Trump Administration to find common ground. In particular, compromise will likely be needed to bring onboard both GOP fiscal conservatives who will want revenue offsets to pay for tax reduction, and Senate Democrats who have the filibuster rule to prevent passage of tax bills with fewer than 60 votes.
The information generally available now about President-elect Trump’s tax proposals is based largely on statements by him during the campaign and campaign materials. The following summarizes some of those key items:
Individual Income Taxes
The last change to the individual income tax rates was in the American Taxpayer Relief Act of 2012 (ATRA), which raised the top individual income tax rate. Under ATRA, the current individual income tax rates are 10, 15, 25, 28, 33, 35, and 39.6 percent. During the campaign, President-elect Trump proposed a new rate structure of 12, 25 and 33 percent:
Current rates of 10 percent and 15 percent = 12 percent under new rate structure.
Current rates of 25 percent and 28 percent = 25 percent under new rate structure.
Current rates of 33 percent, 35 percent and 39.6 percent = 33 percent under new rate structure.
This rate structure mirrors one proposed by House Republicans earlier this year. Closely-related to the individual income tax rates are the capital gains and dividend tax rates. The current capital gains rate structure, imposed based upon income tax brackets, would presumably be re-aligned to fit within President-elect Trump’s proposed percent income tax bracket levels.
The Affordable care Act (ACA) created a number of new taxes that impact individuals and businesses. The ACA created the 3.8% net investment income (NII) tax and the 0.9% Additional Medicare Tax, both of which generally impact higher income taxpayers. The ACA also made significant changes to the medical expense deduction and other rules that affect individuals. For individuals and employers, the ACA created new mandates to carry or offer insurance, or otherwise pay a penalty.
President-elect Trump made repeal of the ACA one of the centerpieces of his campaign. During the campaign, the President-elect said he would call a special session of Congress to repeal the ACA. At this time, how repeal may move through Congress remains to be seen. Lawmakers could vote to repeal the entire ACA or just parts.
Business Tax Proposals
On the business front, President-elect Trump highlighted small businesses, the corporate tax rate, and some international proposals during his campaign; along with simplification, and tax reduction for small business.
Particularly for small businesses, Trump has proposed a doubling of the Code Sec. 179 small business expensing election to $1 million. Trump has also proposed the immediate deduction of all new investments in a business, which has also been endorsed by Congressional tax reform/simplification advocates.
The current corporate tax rate is 35 percent. President-elect Trump called during the campaign for a reduction in the corporate tax rate to 15 percent. He also proposed sharing that rate with owners of “pass through” entities (sole proprietorships, partnerships and S corporations), but only for profits that are put back into the business.
Based on campaign materials, a one-time reduced rate would also be available to encourage companies to repatriate earnings of foreign subsidiaries that are held offshore. Many more details about these corporate and international tax proposals are expected.
During the campaign, Trump proposed to repeal the federal estate and gift tax. The unified federal estate and gift tax currently starts for estates valued at $5.490 million for 2017 (essentially double at $10.980 million for married individuals), Trump, however, also proposed a “carryover basis” rule for inherited assets from estates of more than $10 million. This additional proposal has already been criticized by some Republican members of Congress, while some Democrats have raised repeal of the federal estate tax as a non-starter.
Overall, broad tax reform is now very likely under President-elect Trump. The details of such reform can often be challenging to predict beforehand, but the items mentioned here seem to be where Trump is headed. We at BFBA can assist you with interpreting how these proposals may impact your specific tax situation. Please contact us if you would like to talk more about your personal tax plan.