With the election of Donald Trump to the Presidency of the United States, we have a new vision for the country beginning now, with its implementation in 2017. Part of President-elect Trump’s vision includes a tax plan that proposes a range of tax cuts for corporations and individuals; a reduction or possible elimination of the so-called ‘death tax’; and the repeal of the ACA (Obamacare) along with its related tax burden imposed by law.
Trump’s plan is to reduce taxes across-the-board, especially for working and middle-income Americans who will receive most of the tax reduction. Individuals would see a reduction in the number of tax brackets from seven to three. As an example:
Reduction of Personal Income Taxes
Brackets & Rates for Married-Joint filers:
- Less than $75,000: 12%
- More than $75,000 but less than $225,000: 25%
- More than $225,000: 33%
The Trump tax proposals would retain the existing capital gains rate structure (maximum rate of 20 percent) with tax brackets shown above. The 3.8 percent Obamacare tax on investment income will be repealed, as will the alternative minimum tax.
His plan will increase the standard deduction for joint filers to $30,000, from $12,600, and the standard deduction for single filers will be $15,000. The personal exemptions will be eliminated as will the head-of-household filing status. This would seemingly eliminate the need to itemize deductions, in many cases, thereby simplifying the completion of the tax return.
In addition, the Trump Plan will cap itemized deductions at $200,000 for Married-Joint filers or $100,000 for Single filers.
The Trump proposal would repeal the death tax, but capital gains held until death and valued over $10 million will be subject to a tax but small businesses and family farms would be exempt from any taxation. To prevent abuse, contributions of appreciated assets into a private charity established by the decedent or the decedent’s relatives will be disallowed.
There may be a reduction in the need for formation of trusts and complicated estate tax planning with the elimination of the estate tax.
Americans will be able to take an above-the-line deduction for children under age 13 that will be capped at a state average for the age of child, and for eldercare for a dependent. The exclusion will not be available to taxpayers with total income over $500,000 Married-Joint /$250,000 Single, and because of the cap on the size of the benefit, working and middle-class families will see the largest percentage reduction in their taxable income.
The Trump proposed tax plan will lower the top tax rate from 35 percent to 15 percent, and eliminate the corporate alternative minimum tax. This rate is available to all businesses, both small and large, that want to retain the profits within the business.
This large reduction in corporate tax rate would significantly undermine the appeal of inversions. Even with a potential compromise rate of 20% versus the 15% rate, the US would be in line with Great Britain’s level of taxation. Ireland’s 12.5% rate would still be enticing. However, it is anticipated that these types of tax tactics may well be nixed as part of any income tax package.
The tax plan will provide a deemed repatriation of corporate profits held offshore at a one-time tax rate of 10 percent. Capital Economics says that this may amount to some $2.5 trillion in foreign profits stashed overseas coming back and taxed in the United States.
Firms engaged in manufacturing in the US may elect to expense capital investment and lose the deductibility of corporate interest expense.
Businesses that pay a portion of an employee’s childcare expenses can deduct those costs. Employees who are recipients of direct employer subsidies would include those costs in the individual income tax and the costs of direct subsidies to employees could not be used as a cost eligible for the credit.
Those taxpayers who are subject to alternative minimum taxation could be relieved of a large tax planning burden if this tax computation is actually removed. Lowering of all tax brackets should provide room to breathe and prosper with the lessening of the burden of taxation for all taxpayers.
Corporations and businesses have perhaps the most planning opportunities given offshore businesses and the repatriation of such assets at a 10% tax rate. Reduction of the US tax from 35% to 15% along with the deductibility of capital investment is intended draw companies back to the United States.
What are the odds that Trump’s tax plan will succeed? It is anyone’s guess, but given what we have witnessed as to his rise to the Presidency, his determination to win, his successes he has attained in his life; there is probably a pretty good chance that real change will happen with a Trump Presidency.
If you have any questions, please contact a Smolin professional today.