Trump’s Tax Reform Plans for Individuals, Businesses, and Estates
Now that the 2016 presidential election is over, it is clear that the Republican-controlled Congress will push for tax reform in the next administration. What is not clear is how quickly this will occur and the extent to which the tax changes will conform to the revisions proposed by President-elect Donald Trump or the House GOP Tax Reform Task Force, led by Ways and Means Committee Chairman Kevin Brady, R-Texas.
The tax reform proposals asserted by Trump and the House Task Force would impact individuals, estates and gifts, and businesses.
Individual tax proposals
Trump’s proposals and those of the Task Force would reduce individual marginal tax rates (and collapse those rates into three tax brackets), significantly increase the standard deduction, limit the use of tax deductions, eliminate personal exemptions, and cap the maximum tax rate on dividends and capital gains.
It would also repeal the alternative minimum tax (AMT), tax carried interest as ordinary business income rather than capital gain, and repeal the 3.8 percent net investment income tax (NIIT) on high income taxpayers (income over $250,000 (joint); $200,000 (single)) that was imposed by the Affordable Care Act (ACA).
Single taxpayers would be subject to higher tax rates on significantly lower income under the president-elect’s proposal. The top individual tax rate for all taxpayers would be reduced from 39.6 percent to 33 percent.
|Trump Proposals||House Task Force Proposals|
12% (Up to $37,500 single; $75,000 married)
25% ($37,500 to $112,500 single; $75,000 to $225,000 married)
33% ($112,500+ single; $225,000+ married)
12% (Up to $37,650 single; $75,300 married)
25% ($37,650 to $190,150 single; $75,300 to $231,450 married)
33% ($190,150+ single; $231,450+ married)
|Capital Gains and Dividends||0%, 15%, and 20% maximum (see income ranges above)||6%, 12.5%, 16.5% maximum (see income ranges above)|
|Standard Deduction||$30,000 (joint)
$18,000 (single with child)
|Personal Exemptions||Eliminated||Eliminated; increased child and dependent credit of $1,500|
|Itemized Deductions||Cap total amount that could be claimed at $100,000 (single) and $200,000 (joint)||Eliminate all itemized deductions except for mortgage interest and charitable contributions|
|Carried Interest||Tax as ordinary income not capital gain||Tax as ordinary income not capital gain|
|ACA 3.8% NIIT||Repeal||Repeal|
|Miscellaneous||Eliminate the 0.9% payroll tax, the medical device tax, and the ACA health insurance tax|
Estate and gift tax proposals
The Trump proposal repeals the “death tax” (presumably the estate tax and any associated generation-skipping transfer tax), but capital gains held until death and valued over $10 million will be subject to tax. The House Task Force proposal simply provides for the repeal of the estate, gift, and generation-skipping transfer tax.
Trump’s proposal would also disallow an income tax deduction for contributions of appreciated assets into a private charity established by the decedent or the decedent’s relatives.
In addition, it is anticipated that controversial estate tax valuation discount rules proposed under IRC 2704, which were expected to be finalized in the near future, will be withdrawn.
Business tax proposals
Trump’s proposal would reduce the corporate tax rate from 35 percent to 15 percent and limit the tax rate on pass-through businesses to 15 percent. He would repeal most tax breaks for businesses (except for the research and development (R&D) tax credit) and the corporate AMT. For foreign subsidiaries of U.S. companies, Trump would impose a maximum 10 percent repatriation tax on their accumulated profits and tax their future profits.
The House Task Force is seeking similar, but not identical, modifications. The House proposal also references H.R. 4377, which would introduce a business cash-flow tax and permit businesses to fully and immediately expense the cost of investments (in lieu of depreciation, deductions under IRC Sections 179, 199, etc.). This system of immediate cost recovery would apply to investments in tangible property (equipment and buildings) and intangible assets (such as intellectual property), but not to land.
|Trump Proposals||House Task Force Proposals|
|Pass-through Tax Rate||15%||25%|
|Tax on Accumulated Profits of Foreign Subsidiaries of U.S. Entities||10%||8.7%|
Whether the Democrats are able to curtail or modify the Republican-led tax reform is unknown. But the Republicans are expected to control the U.S. Senate in 2017 by a margin of 52 to 48 (assuming Louisiana elects a Republican senator). That control is not sufficient to break a filibuster advanced by Senate Democrats since 60 Senate votes are required to stop a filibuster.
In 2018, 25 Democratic Senate seats will be up for re-election, and some believe that at least 10 of those seats might flip to the Republicans because more than 55 percent of the vote in those states was cast for President-elect Trump. If that were to occur, in January 2019, the U.S. Senate would be controlled by Republicans 62 to 38, which would be sufficient to prevent a Democratic-led filibuster against the Republicans’ tax reform proposals.
However, because the Republicans are unlikely to want to wait that long to begin implementing their tax reform proposals, there is an expectation that both parties will work together to accelerate this process and may reach acceptable accommodations for their respective constituents. If they are unable to work together, tax reform may remain the same until the 2018 mid-term elections.
How we can help
No one knows what the future holds, but we do have a clear reform outline under both the executive and legislative tax agendas. Whether or not there is the political will to enact these changes in 2017, you should start planning for possible scenarios. Having a discussion with your tax advisor before the new year will help you give thoughtful consideration to all the opportunities and challenges for you and your family.