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Tax Reform 2.0 Proposed Updates | September 25, 2018

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How could Trump’s tax plan impact you?

Brady Dixon, CPA | November 17, 2016

With the President-Elect in place, tax law changes are more likely to occur in the near future.

Although the details of president-elect Trump’s tax plan are still unclear, it is essential to consider the possible changes and identify planning opportunities that may exist.

If for the sake of analysis, we assume that Mr. Trump’s tax proposals become policy, the question arises, “How do these changes impact individuals, businesses, and the overall economy?”

President-Elect Trump’s primary vision is to protect middle and low-income Americans by reducing taxes. Theoretically, the fewer taxes we have should result in increased consumption because of the extra dollars being reinvested into the American economy.

Also, by lowering the business tax rate from 35% to 15%, firms will inevitably retain profits of which they can pour back into the business. The outcome of greater liquidity creates opportunities for businesses to improve growth.

Whether you agree, disagree, or are unsure of Trump’s tax proposals, all we can do is begin to synthesize the effects of the proposed provisions, and prepare accordingly for 2017 and beyond.

Proposed changes to the individual income tax:

  • Consolidate the seven tax brackets we have currently down to three, with rates of 12%, 25% and 33% based on ordinary income for joint filers of $0 to $75,000, $75,000 to $225,000 and over $225,000 respectively. Brackets for single filers would be half of the stated amounts.
  • Current rates for qualified dividends and capital gains would adapt to the new brackets.
  • The head of household filing status would be eliminated.
  • Increase the standard deduction from $6,300 to $15,000 for single filers and $12,600 to $30,000 for joint filers.
  • Eliminate the personal exemption completely.
  • Eliminate the 3.8% tax on investment income.
  • Place a limitation on itemized deductions for single filers and married couples filing jointly at $100,000 and $200,000 respectively.
  • The alternative minimum tax (AMT) would be eliminated.
  • Introduce other childcare-related tax provisions:

An above-the-line deduction for childcare costs up to the average cost of care in their state. The deduction would be phased out for individuals earning more than $250,000 or couples earning more than $500,000.

Childcare tax credits of up to $1,200 a year for childcare expenses to lower-income families, through the earned income tax credit.

Proposed changes to business income tax:

  • Reduce the corporate (C corporations) tax rate from 35% to 15%.
  • Potentially allowing the reduced rate to be shared with sole proprietorships, partnerships and S corporations. However, for these pass-through entities, the additional profits would require reinvestment into the firm.
  • Eliminate the corporate alternative minimum tax (AMT).
  • Small businesses would have the opportunity to expense up to $1,000,000 due to the doubling of Section 179.
  • Discussion around new investments being granted immediate deduction due to the simplification of the tax code.
  • Eliminate all business credits except for the research and development credit.
  • Eliminate the domestic production activities deduction (DPAD) under Section 199.
  • Enacts a deemed repatriation of currently deferred foreign profits, at a tax rate of 10 percent.
  • Increases the cap for the tax credit for employer-provided day care under Sec. 205 of the Economic Growth and Tax.
  • Relief Reconciliation Act of 2001 from $150,000 to $500,000 and reduces its recapture period from 10 years to 5.

Proposed changes to Federal Estate and Gift Tax:

  • Eliminate the Federal Estate Tax completely.
  • Disallow the step up in basis for estates over $10,000,000.

Sources:
http://taxfoundation.org/article/details-and-analysis-donald-trump-tax-reform-plan-september-2016