October 6, 2017

Trump Tax Plan Highlights

The Trump Administration announced the framework for their tax plan changes last week.  The changes that are in the Trump Tax Proposal are designed to simplify the tax code, reduce taxes for majority of Americans, make America Corporations more competitive and to bring back the trillions of profits held overseas to help stimulate the U.S. economy.

While we cannot predict if the proposed tax legislation will be passed, there is a very good chance tax reform will get done even if the Republicans have to pass it under Reconciliation rules.

Here are some of the key points of the Trump Tax Plan Proposal:

Proposed Changes for Individuals:

The current framework proposes three tax brackets of 12%, 25% and 35%.  This would reduce the number of brackets from the current structure of seven and also removes the highest bracket of 39.6%.  The proposal does, however, leave open the possibility of adding a fourth, higher bracket.

  • The proposed income ranges of each tax bracket have yet to be released, making truly identifying the benefits of these new brackets challenging.
  • A new method of more accurately indexing the brackets for inflation has been proposed but has not been outlined in any of the Proposals.
  • The framework repeals the personal exemptions for dependents ($4,050/person in 2017) but increases the Child Tax Credit (amount not yet released), while also increasing the income levels at which the credit is phased out.  Exemptions are deducted from AGI to help determine the amount of taxable income, whereas credits are a dollar-for-dollar reduction of actual taxes owed (and some of the credit will still be refundable).
  • The Standard Deduction will be nearly doubled – for single filers this will increase to $12,000 (from $6,350) and $24,000 (from $12,700) for married filing jointly.
  • The proposal includes eliminating many of the current itemized deductions
  • The proposal continues to only explicitly retain the mortgage interest deduction and charitable contributions deduction; medical expenses would seem to be another item to preserve but is certainly on the chopping block with the rest.
  • Residents in states with high state income tax rates such as California and New York will likely be opposed to the loss of the deduction of state taxes.
  • The Alternative Minimum Tax (AMT) would be repealed.  The reasoning for this is that it was intended to prevent wealthy families from not paying enough taxes, but it no longer serves its intended purpose (more taxpayers are impacted by it than intended) and adds more layers of complexity to taxes.
  • The Estate and Generation Skipping Taxes would also be repealed.  Left unaddressed in the proposal are the step-up for inherited assets and gift taxes.

Proposed Changes for Corporations & Small Business Owners:

  • The U.S. currently has one of the highest maximum corporate tax rates (35%) in the world.  Being proposed is a 20% top tax rate for C corporations, as well as the review of methods to reduce the double taxation of earnings.  The average rate on corporations for the rest of the developed world is 22.5%.
  • The framework proposes a 25% maximum tax rate on pass-through income from small businesses.  These types of income under the current system are taxed at the individual’s personal income tax rates.
  • The proposal includes exemption of foreign profits of U.S. owned companies when they are repatriated to the United States, designed to bring back profits from overseas and back into the economy.  Foreign earnings that have accumulated under the current system are considered repatriated under a one-time lower rate, or a “tax-holiday”.

Conclusion:  Keep in mind that the framework is devoid of technical details as well as the start dates of these proposed changes, so the introduction of this may be seen as a starting point in efforts to find an agreeable resolution with both sides of the aisle.  Some initial analysis of the plan estimates an increase in the national debt level of trillions of dollars over the next decade.  Until lawmakers can figure how to offset the cuts and make the plan deficit-neutral, this could be a stumbling block to getting the legislation passed.  Republicans can still pass a tax-reform bill through budget reconciliation by a simple majority.

 

We will continue to monitor this situation as new information becomes available.