A journey into the unknown, tax reform according to President Trump!
By Steven J Weil, PhD, EA 04/27/17
President Trump’s dreams for tax reform and simplification include lowering the tax rate for Corporations from an indexed rate topping out at 35% with eight brackets to a flat rate of 15%. This rate would also be extended to business income from pass-through business such as an S-Corporation, Partnership or Sole Proprietorship, which have all been taxed at the same rate as other income on the owner’s personal tax return and (depending on their tax bracket) could have been as high as 39.6%. We believe this income will be treated separately under the proposal much as long-term capital gains are today and taxed at a 15% rate.
Corporations with foreign affiliate profits abroad would be given a one-time opportunity to bring those profits back to the U.S. at a tax rate of 10%. Future foreign profits would be exempt from U.S. tax as the president wants that tax system to be more territorial, which means no longer taxing based on worldwide income and the U.S. taxing only income earned in the U.S. How — and if — this would also apply to individuals is anyone’s guess.
The president also wants to eliminate the 3.8% Net Investment Income Tax which applied to those with income in excess of $250,000 for married taxpayers filing jointly and $200,000 for single taxpayers. This additional tax was created under the Affordable Care Act (ACA) also known as Obama Care.
Individual taxpayers would also get a break if tax rates are lowered and the number of tax brackets is reduced. Savings would depend on where the new brackets fall. If, for example, the 10% bracket replaces both the 10% and 15% brackets and the 25% bracket takes the place of the current 25% through 33% brackets with the new 35% bracket replacing both the current 35% bracket and the top 39.6% bracket, taxes for many (but not all) would be reduced. The truth is we just don’t know how this will play out yet.
Also, mentioned in the president’s proposal is the elimination of the Alternative Minimum Tax. While thought by many to be a way to keep the rich from paying too little, this tax often sneaks up on middle-income taxpayers due to a one-time event. Take, for example, a taxpayer retiring and selling off rental property for a large gain after many years who finds that he now has to calculate and pay an additional alternative minimum tax, or any number of other items.
For individuals and married couples the standard deduction would be doubled. It would be increased to $12,700 for single taxpayers and to $25,400 for married taxpayers, while deductions would be limited to mortgage interest and charitable deductions. However, based on the increased standard deduction, only those with very large mortgages combined with very large charitable deductions would get any benefit from itemizing their deductions. Gone are deductions for medical, Real Estate Tax, State Income Tax and everything else. This could hurt those in high-income tax states or fuel the trend of moving to lower tax states.
The president also wants a repeal of the estate tax. This does not affect those with estates valued under $5,450,000 as this amount is exempt today, but could make it less taxing for those with much of their wealth tied up in family businesses or farms to pass on their business or farm intact to future generations without having to figure out how to pay the tax money and still be able to keep the farm or business. Again we don’t know the details. Will the current Step-Up in tax basis at death remain, or will that be eliminated as well, leaving a greater income tax liability if and when inherited assets are sold?
It’s important to remember before any of this becomes law it will have to make it through the House and the Senate, not an easy task even with Republicans in charge of both. If this is anything like past tax bills, there will also be a lot of uncertainty even after passage and signature by the president as rules will need to be written by the Treasury and the IRS or whatever their replacement agency is named. It will then take years before the courts determine what it all means. So buckle your seat belts. It’s going to be a bumpy ride.