Posted by David Roer, CPA
I’m not sure if you heard, but a Presidential election happened this past year!
As with every inaugural year, there’s an expectation that the President will push certain talking-points into action sooner vs. later. This year is no different.
A big talking point within the Trump administration has been the urgency regarding tax reform and an indication that the reform could happen within 2017. With the Republicans controlling the White House and both houses of Congress, the expectation for tax reform to rapidly occur seems all the more likely.
With that in mind, it’s important to remember that the following is not fact, but rather a ‘guesstimate’ as to what President-elect Trump may push through as reform, as it is solely based on his stated agenda throughout the election process.
INDIVIDUAL INCOME TAX
As it’s referred to on President-elect Trump’s website (donaldjtrump.com/policies/tax-plan), the ‘Trump Plan’ calls for reducing the individual income tax brackets from the current seven to three (the following are for married-filing-joint):
- < $75,000 – 12%
- $75,000 – $225,000 – 25%
- > $225,000 – 33%
Most notably, the Trump Plan would look to repeal the alternative minimum tax (AMT) as well as the 3.8% Net Investment Income tax (which was created to help with Obamacare).
But, as we’ve all been taught, if there’s a yin, there must be a yang: while the Trump Plan aims to reduce individual income tax rates, several deductions will be lost as well; most notably, itemized deductions will be capped at $200,000 for married-filing-joint filers or $100,000 for single filers.
The Trump Plan also seeks to lower the corporate tax rate from 35% to 15% (and, similar to the individual plan, eliminate the corporate AMT).
In an effort to bring business from overseas, the Plan also calls for a one-time “amnesty” 10% tax on repatriation of corporate profits held offshore. This repatriation would be a significant draw for US corporations that own foreign corporations that conduct at least 25% of the group’s total business activity.
On the deduction side, the Plan would eliminate several business tax credits, most notably the domestic production activities deduction (Section 199 ‘DPAD’). Carried interest would be taxed as ordinary income, and the Research & Development credit would remain intact.
Additionally, the Plan would look to allow firms engaged in manufacturing within the US to elect to expense (rather than capitalize) capital assets, but lose the deductibility of corporate interest expense. The election could be revoked within the first three years of election; however, after three years, the election would be irrevocable.
The Trump Plan seeks to repeal the ‘death’ tax entirely. However, any capital gains held until death and valued over $10 million would be subject to tax.
Since this could leave room for asset-shifting abuse, contributions of appreciated assets into a private charity established by the decedent (or their relatives) would be disallowed.
The Plan also would allow an above-the-line deduction for children under 13 up to $5,000 of child care expenses (this deduction would be eliminated for married-filing-joint filers of $500,000 or a single individual of $250,000).
In addition, the Plan would propose Dependent Care Savings Accounts (DCSAs), which would allow parents to make annual contributions of up to $2,000 per year. All deposits and earnings would be free from taxation, with unused balances available to be rolled over from year-to-year.
As further incentive for the DCSA, the Trump administration would provide a 50% match on contributions (i.e. a $1,000 contribution by the government).
While it’s yet to be seen whether any or all of the above proposals become enacted, it is safe to say that some form of tax reform is headed our way. As tax practitioners and taxpayers, it’s important to stay updated on these issues, so as best to prepare and plan for the coming years ahead.
Our REM Cycle team will keep you updated as developments unfold.