Highlights of President Trump’s Tax Reform Outline
Let’s start our overview of President Trump’s tax reform outline “2017 Tax Reform for Economic Growth & American Jobs” by revisiting his campaign promises.
During the campaign, President Trump called for reducing the number of individual income tax rates, lowering the individual income tax rates for most taxpayers, lowering the corporate tax rate, creating new tax incentives, and repealing the Affordable Care Act’s tax-related provisions.
His goals for tax reform were to:
Provide tax relief for middle class Americans
Simplify the Tax Code and
Grow the American economy
Under current tax law, individual income tax rates are 10, 15, 25, 28, 33, 35, and 39.6 percent. The President’s proposal calls for replacing the current individual tax rates with a new, three-bracket range of 10, 25 and 35 percent.
The current standard deduction for 2017 is $6,350 for a single taxpayer and $12,700 for a jointly filed tax return. The President’s proposal calls for doubling the standard deduction. By doubling the standard deduction, the intention is to simplify tax filings but it would also minimize the tax benefits associated with itemizing deductions.
Itemized Deductions, Exemptions & Filing Status
The President’s plan would eliminate all the tax deductions except for mortgage interest and charitable contributions. The loss of other itemized deductions, such as medical expenses, the state and local tax deduction, the real estate tax deduction, and miscellaneous itemized deductions would allow an even greater number of taxpayers to use the standard deduction if doubled.
During the presidential campaign, President Trump proposed an overall cap on the amount of itemized deductions that could be claimed at $100,000 for a single taxpayer and $200,000 for married couples filing jointly. Additionally, other proposals called for elimination of all personal exemptions as well as the head of household filing status.
Alternative Minimum Tax (AMT)
President Trump’s proposal calls for the repeal of the AMT citing its complications. The AMT is basically a parallel tax system which requires taxpayers to calculate their taxes twice to see which results in a higher overall tax. The AMT was originally designed to ensure individuals, corporations, estates and trusts with substantial incomes that use favorable tax provisions to lower the overall tax rate to pay at least a minimum amount of income tax.
Federal Estate & Gift Tax
President Trump’s proposal calls for the repeal of the federal estate tax. The current federal estate tax rate is 40% for estates valued more than $5.490 million for 2017; essentially double at $10.980 million for married individuals. During the campaign, President Trump also proposed a “carryover basis” rule for inherited stock and other assets from estates of more than $10 million. The carryover basis rule applies to estate beneficiaries who must use the decedent’s basis in the inherited assets rather than the date of death value under existing law.
President Trump’s estate tax repeal proposal is silent on what will become of the gift tax.
Family Oriented Tax Breaks
The President’s tax proposals call for unspecified tax relief for families with child and dependent care. During the campaign, proposals had included the creation of deduction for child and dependent care expenses as well as expanding the earned income tax credit for working parents who do not otherwise qualify.
Net Investment Income Tax
The Affordable Care Act (ACA) created an additional 3.8% tax impacting higher income taxpayers on net investment income (NII). NII generally excludes pensions, IRA distributions, and social security but includes income derived from interest, dividends, capital gains, rental income and passive income from pass through entities. President Trump has proposed a repeal of the NII tax.
The maximum corporate tax rate is currently 35%. The President’s proposal calls for a reduction in the corporate tax rate to 15%
Currently, pass through entity owners (shareholders of S corporations and partners or members of LLC’s taxed as a partnership) and sole proprietors may be taxed at the highest tax rate of 39.6%. The President’s proposal calls for a 15% tax rate for pass through entity income, leaving out sole proprietors. Subsequently, presidential aides later indicated that sole proprietors who file IRS Schedule C would be included in the 15% tax rate plan.
Bonus Depreciation and Section 179 Depreciation
In 2015 Congress passed The Protecting Americans from Tax Hikes Act (PATH) which extended bonus depreciation through 2019 and made permanent enhanced section 179 depreciation expensing. President Trump’s tax proposal does not provide for any extension of the bonus depreciation after 2019.
Repatriation of Offshore Corporate earnings
The President’s plan calls for a one time reduced tax rate to encourage companies to repatriate earnings of foreign subsidiaries that are held offshore. The tax rate for re-patriated earnings is yet unspecified, but a 10% tax rate has been suggested by various stakeholders. This provision is part of President Trump’s plan to grow the economy and pay for infrastructure improvements.
Timeframe for Draft Tax Reform Legislation:
Treasury Secretary Mnuchin characterized President Trump’s tax reform outline as a representation of his core principles. Secretary Mnuchin also stressed that Treasury was working closely with House and Senate GOP leaders on the tax reform package but no time table has been set for when legislative language will be released.
GFK Tax Reform Updates:
We will provide updates on President Trump’s tax reform legislation as it moves through the legislative process. In the interim, if you would like to discuss any tax planning issues under President Trump’s tax reform, please contact us.
[updated May 17, 2017]
IRS Issues Proposed Regulations That Restrict Marketability and Control Discounts - co-authored by Michelle Gallagher, CPA/ABV/CFF for the October, 2016 issue of the AICPA FVS Digest.