Posted by David Roer, CPA
On revisiting a TrumpWatch article I wrote back in January, I was struck by the opening tagline:
“There’s been an abundance of 2016 headlines you’ve no doubt heard on loop this year and are probably sick of listening to – Brexit! Zika! ISIS! The election! Star Wars! One headline that we at REM Cycle can’t get enough of, however, is the Trump Tax proposal.”
Almost a full year later, sadly the same holds true for 2017, except substitute the headlines with: Equifax! Hurricanes! North Korea! The White House! and (still) Star Wars! Sad.
On September 27, President Trump and “The Big Six” (a name given for a tax crew consisting of Gary Cohen, Steven Mnuchin, Mitch McConnell, Orrin Hatch, Paul Ryan, and Kevin Brady, and which sounds like it could be the title for a Quentin Tarantino film) detailed the skeleton of what a Trump Tax Reform could look like.
While the nine-page plan is just that—a plan—many believe that the window of opportunity for getting a bill passed in 2017 seems unlikely: with only 28 working days remaining on the legislative calendar, chances for a 2017 tax reform are increasingly slim.
With that being said, as the October 15 tax extension deadline has come and gone, we at the REM Cycle look to the future.
We’ll focus on individual tax changes within the proposed nine-page plan.
Let’s begin with tax rates. The proposal indicates a three-tax bracket system: 12%, 25%, and 35% (the current top rate is 39.6%). Trump did leave wiggle room, however, for a fourth bracket to be enacted if the tax-writing committees (maybe they’ll get a Hollywood-esque nickname like “The Big Six” too?) grant it to be so: to quote the plan: “an additional top rate may apply to the highest-income taxpayers to ensure that the reformed tax code is at least as progressive as the existing tax code and does not shift the tax burden from high-income to lower-and middle-income taxpayers.”
Another important detail left out of the plan regarding the three tiers is the income ranges for the three (or potentially four) brackets. This leaves a lot in the air as to determining whom these bracket changes may impact the most.
In the context of tax rates, the plan also indicates a full repeal of the Alternative Minimum Tax (AMT, a 28% minimum tax that, simply put, ‘traps’ those individuals with certain high deductions by the disallowance of them). The plan also eliminates most itemized deductions except for charitable donations and mortgage interest paid, rendering the AMT moot for many taxpayers who are subject.
On the topic of itemized deductions, the items that are getting most discussed are the state taxes paid and real estate tax deduction. These two items are heavily utilized (unless you’re in the AMT) by taxpayers, especially those living in high state-income tax states like New York and California. I envision this to be a heavily disputed topic as any tax reform bill begins to work its way through Congress, especially since President Trump was angered to learn that this would increase middle-income taxpayer burden.
With an elimination of significant itemized deductions, the plan attempted to counter that ‘hit’ by increasing the standard deduction by nearly doubling it: $12,000 for individuals (an increase from $6,350) and $24,000 for married couples (an increase from $12,700).
The plan also mentions the child tax credit, which would make the first $1,000 of the child tax credit refundable as well as increase the income levels at which the credit would begin to phase-out for individuals.
In a section titled “WORK, EDUCATION AND RETIREMENT,” the plan shuns specifics, merely explaining that “the framework retains tax benefits that encourage work, higher education and retirement security ... Tax reform will aim to maintain or raise retirement plan participation of workers and the resources available for retirement.”
Lastly, the plan proposed the full elimination of the generation skipping tax and the estate tax, a tax which applies to Estates in excess of $5.49 million or more as of 2017. This will only benefit the wealthiest Americans (in the top 0.1%).
While the release of the nine-page proposed plan wasn’t too much of a shock (most of the above had been discussed in the infancy of Trump’s presidency earlier this year), I envision the details, once emerged, will begin a more serious discussion of (a) how to begin working on 2018 tax planning and (b) coming up with a catchier nickname than The Big Six.
Stay tuned to the REM Cycle for more TrumpWatch updates.