Trump Tax Proposals
The following is an overview of President-Elect Trump’s (“Trump”) tax plan based upon the tax proposals put forth during his candidacy. Congress must approve the trump tax proposals before they become law and, thus, the final outcome of these proposals are quite likely to be different then the original plan suggested by Trump.
Trump Tax Proposal – Tax on Individuals
Tax on Ordinary Income. Under current law, individuals are taxed for federal purposes based upon seven different tax brackets, the highest of which is 39.6 percent. Trump intends to simplify the current law by reducing the number of tax brackets from 7 to 3 with a top marginal tax rate of 33%.
For Married Filing Joint tax filers the three new marginal proposed tax rates are:
Taxable Income less than $75,000……………………………………………….12%
Taxable Income $75,000+ but less than $225,000………………………..25%
Taxable Income $225,000+. ……………………………………………………….33%
When compared with current law, at the lower tax brackets the new rates provide a small tax savings over current law. Under the current proposal, some married people filing joint returns currently taxed at 28% will be taxed at 33% under the new plan. If you are a single, upper middle-class, taxpayer with taxable income between $190,151 and $413,350, your marginal tax bracket will remain at 33%. If you are married and you and your spouse have a joint taxable income between $231,451 and $413,350 your marginal tax bracket will remain at 33%. Trump has said that any increase in tax for an individual will be changed “when final legislation is approved so that no American will face a rate increase”.
Trump Tax Proposal – Capital Gains Tax
Capital assets are assets held for investment and, thus, are not used in the ordinary course of a taxpayer’s business to generate ordinary income. Examples of capital assets include real estate, stock and bonds, and works of art, provided such assets are held for investment and, thus, the taxpayer is not a broker or dealer who depends on sales of such items as part of his or her ordinary business. The sale of such investment property at a profit creates a capital gain which is treated differently for tax purposes than ordinary income.
Under current law, capital gains are subject to three brackets: 0%, 15%, and 20%. Thus, the top tax rate applicable to capital gains is 20% versus the top tax rate for ordinary income of 39.6% as described earlier. Under Trump’s tax plan the capital gain rates remain the same: 0%, 15%, and 20%. However, within Trump’s lowest income tax bracket, the 12% bracket, the capital gains rate could be 0% or 12%.
It seems that if Mr. Trump intends to keep his promise that, “when final legislation is approved no American will face a rate increase”, there will be no capital gains tax on married taxpayers having a taxable income of $75,300 or less.
Trump Tax Proposal – Child Care Deduction
Taxpayers will be eligible to take a tax deduction for child care for children under age 13, and for elder care paid on behalf of a dependent senior. Married Filing Joint taxpayers with Gross Taxable Income over $500,000 and Single Taxpayers with Gross Taxable Income over $250,000 will not be eligible for the deduction for child care. The child care will only be provided to families who use stay-at-home parents or grandparents as well as those who use paid care givers and is limited to 4 children per taxpayer.
Generally speaking, the biggest difference between the Trump child care tax plan and current law relates to how each plan treats two-earner couples and one-earner couples equally. Other than that, the tax proposals pay benefits that are quite similar to what the current law offers, albeit in a different form of a deduction rather than a credit.
Trump Tax Proposal – Care for the Elderly
Trump’s child care plan also offers a senior care component whereby care givers would be able to take a tax deduction of up to $5,000 for costs of home care or adult day-care programs. The deduction would be available to singles with income less than $250,000 or couples making $500,000 or less. Both those who itemize their deductions and those who take the standard deduction would get the subsidy. Additionally, the Trump plan would provide an additional “rebate” to low-income households by increasing the Earned Income Tax Credit.
The deduction might even be available to those who stay home to care for parents and do not use paid care givers.
Trump also proposes six weeks of partially-paid maternity leave, though it is not clear if it would also be available to those caring for aging parents.
Trump Tax Proposals – Other Notable Changes
Under the proposed new plan the standard deduction would increase for joint filers to $30,000, up from $12,600.00. The Head of Household filing status will be eliminated and the Alternative Minimum Tax (AMT) will disappear, which is noteworthy when one considers that the first form of the AMT was enacted in 1969. The AMT was originally prompted by an announcement that 155 high-income households had not paid a dime of federal income taxes. The households had taken advantage of so many tax benefits and deductions that they had reduced their tax liabilities to zero. Congress responded by creating an add-on tax on high-income households, equal to 10% of the sum of tax preferences in excess of $30,000 plus the taxpayer’s regular tax liability. Thus, if the AMT is terminated after being carried on the books for forty-seven years it clearly will be a noteworthy change in our current tax law.
Finally, there is a proposal to repeal the Affordable Care Act, although on November 11, 2016, Trump stated he will retain the provisions for age 26 and under dependents on parents’ insurance. Further, on November 20, 2016, Trump said he would keep that portion of the Affordable Care Act that applied to children who live at home.
Trump Tax Proposal – Tax on Estates
Trump has proposed that the Federal Estate Tax be abolished, along with the gift and generation skipping transfer taxes. Taxes on capital gains valued over $10 million is to be subject to tax. To prevent manipulation by taxpayers hoping to avoid the tax, contributions by the decedent or his family of appreciated assets to a private charity will be disallowed. Thus, the first $10 million of capital gains passes tax free. The excess over $10,000. will be taxed at capital gains rates. A “step-up” in the tax basis of assets belonging to a decedent to fair market value at time of death will be allowed on the first $10 million dollars. Any assets over $10 million will be subject to “carry-over” (i.e. the existing tax basis) of such assets.
Trump Tax Proposal – Tax on Businesses
Trump has proposed a reduction on the tax rate on corporations from 35% to 15% with an accompanying elimination of the Alternative Minimum Tax. The proposal does not affect small business corporations that pass income through to their shareholders where it is taxed under the individual income tax provisions of the law. That is the tax cut applies to “C” corporations, not to “S” corporations.
The new tax proposal will eliminate most current day corporate income tax deductions except the Research and Development Credit, cutting the corporate income tax rate by more than half, to 15%. When compared with other countries, the 15% tax is less than the income tax levied by most countries, with the exception of countries such as the Bahamas (0%) and Ireland (12.5%).
It is not clear, but Trump may also be proposing an elective tax determination for partnerships to enable their owners to take advantage of the 15% rate for undistributed income.
With the aim of encouraging US employment, the new business tax would permit a deduction for wages paid to US citizens. It would not permit a deduction for foreign wages. Clearly, the accountants will have a new line-item to account for as a result, and will include the difference as part of their reconciliation between corporate book income and taxable income.
Trump Tax Proposal – Overview
It is believed that individual taxpayers will receive an average tax cut of $1,818 under the Trump plan. In combination with overall economic reform, Trump’s economic proposals are intended to create a minimum of 25 million jobs over the next 10 years. Overall, it is estimated that about half of the benefits from the Trump plan will go to the top 1% of households that earn more than $700,000 yearly. The overall impact would result in a reduction in funds to the federal government of between $3.5 trillion over 10 years from the changes to individual taxation and $7 trillion overall. If increased federal borrowing results to fill the gap, such borrowing will likely have a negative effect on current interest rates which will have a roll-over effect on individual and corporate investment planning.
If you are unsure how these tax proposals will impact your business, we can help.
Mark A. Krohn, a partner, is in charge of the Business Law Team and is also a member of the Trust & Estates Team and is a CPA. He can be reached by phone at our Walden, NY office at 866-303-9595 toll free or 845-764-9656 and by email.