Tax Changes to Expect from President-elect Trump
Following the election of Donald Trump as the 45th U.S. President on November 9, many have begun predicting the impact his proposed changes to U.S. tax laws will have. During his campaign, President-elect Trump centered many of his proposed plans on reducing taxes—including lower income tax rates for both individuals and businesses.
While you would still likely need a crystal ball to determine which of President-elect Trump’s proposals he will be able to navigate through Congress and, if adopted, what their final form would be, you might find it useful to review a summary of the proposals he made during the campaign. We present below noteworthy excerpts from the recent “Post-Election Tax Policy Update” published by CCH, a software and information resource we use frequently for research and tax law briefings. Should you have any questions with regard to any of the proposals listed and how they might affect your personal tax situation, please do not hesitate to contact us at firstname.lastname@example.org or by phone at (212) 245-5900.
“During the campaign, Trump proposed to compress into only three tax brackets the current seven tax brackets, which currently tops out at 39.6 percent. Trump’s proposal would reduce rates on ordinary income to 12, 25, and 33 percent.
Under Trump’s plan, the standard deduction would increase to $15,000 for single individuals and to $30,000 for married couples filing jointly. In contrast, the 2017 standard deduction amounts under current law are $6,350 and $12,700, respectively, as adjusted for inflation.
Trump also proposed during the campaign to implement a cap on the amount of itemized deductions that could be claimed at $100,000 for single filers and $200,000 for married couples filing jointly. Additionally, according to campaign materials, all personal exemptions would be eliminated, as would the head of household filing status.
Projected Impact – One result of increasing the standard deduction would likely be to reduce the number of taxpayers who itemize deductions.”
“The current rate structure for capital gains would apparently remain unchanged under Trump’s plan. Trump presumably would also retain the same rates for qualified dividend income. However, Trump has proposed to repeal the 3.8 percent net investment income (NII) tax imposed on passive income, including capital gains.
INDIVIDUAL INCOME TAX RATES
|Trump/GOP Rates||Joint Filers: Blueprint||Single Filers: Blueprint|
up to $75,300
up to $37,650
25% & 28%
|up to $231,450||
up to $190,150
|33%, 35% & 39.6%||33%||above $231,450||
Projected Impact – The current capital gains rate structure, imposed based upon income tax brackets, would presumably be realigned to fit within Trump’s proposed percent income tax bracket levels.”
Estate and Gift Tax
“During the campaign, Trump proposed to repeal the federal estate and gift tax. The unified federal estate and gift tax kicks in at $5.490 million for 2017 (essentially double at $10.980 million for married individuals).
Projected Impact – During the campaign, Trump also added to estate and gift tax repeal a proposal that would disallow ‘stepped up basis’ to shelter otherwise taxable gains of more than $10 million under the income tax. Currently, any asset that passes through an estate receives a tax basis equal to date of death value, a significant tax advantage when the asset is eventually sold by heirs. Trumps plan would appear to provide exemptions for small businesses and family farms.”
Childcare Tax Benefits
“Trump proposed during the campaign to create a new deduction for child and dependent care expenses, as well as increasing the earned income tax credit (EITC) for working parents who would otherwise not qualify for the deduction. Trump’s plan, as explained during his campaign, would provide:
- ‘Spending rebates’ to lower-income families for childcare expenses through the EITC. ‘The rebate would be equal to a certain percentage of remaining eligible childcare expenses, subject to a cap of half of the payroll taxes paid by the taxpayer,’ according to campaign materials.
- ‘Above-the-line’ deductions for child and elder care expenses, for qualified taxpayers with income up to certain thresholds.
Trump also proposed during the campaign to create Dependent CARE Savings Accounts (DCSAs), tax-favored savings accounts for children, including unborn children, and dependent care expenses, which would be matched by a government contribution. The savings accounts would have an annual contribution limit. Trump’s plan would also expand the credit for employer-provided child care.”
“Trump proposed during the campaign to tax carried interest as ordinary income.
Projected Impact – Private equity partners have been taxed at 20 percent, the current top rate for capital gains.”
Corporate Income Tax
“During the campaign, Trump proposed to lower the business tax rate to 15 percent and eliminate the corporate alternative minimum tax” (currently, the top corporate income tax rate is 35 percent).
Trump’s campaign materials about how pass-through entities (sole proprietorships, partnerships, and S corporations) would be taxed are broad-brush. Generally, Trump’s campaign materials indicate that the owners of pass-through entities could elect to be taxed at a flat rate of 15 percent on their pass-through income retained within the business, rather than be taxed under regular individual income tax rates (the top individual rate would be 33 percent under Trump’s plan).
Projected Impact – This plan would appear to give a business quasi-corporate status in being able to be taxed at a new 15 percent corporate tax rate until assets are distributed. Upon distribution, a second layer of tax would be imposed similar to dividends now taxed to C Corporation shareholders.
Comment – Trump’s campaign materials also indicated a consideration of rules that would prevent pass-through owners from converting their compensation income taxed at higher rates into profits taxed at the 15 percent level.”
Business Tax Incentives
“According to campaign materials, unspecified ‘corporate tax expenditures’ would be eliminated, except for the Research and Development (R&D) credit, in exchange for a lower corporate tax rate.
Section 179 expensing – Specifically directed toward small businesses, Trump during the campaign indicated that he would increase the annual cap on Section 179 expensing from $500,000 to $1 million.
Childcare credit for businesses – During the campaign, Trump proposed to increase the annual cap for the business tax credit for on-site childcare. Additionally, the recapture period would be reduced.
Manufacturing expensing – In lieu of deducting interest expenses, Trump proposed during the campaign that manufacturing firms would be able to immediately deduct all new investments in the business.”
HEALTHCARE RELATED TAXES
“Trump proposed throughout the campaign to ‘repeal and replace Obamacare,’ the Affordable Care Act (ACA), entirely, including all associated taxes. Trump’s campaign materials, however, only mention repealing the ACA’s 3.8 percent NII tax.
Cadillac tax – Under current law, the so-called ‘Cadillac tax’ on high dollar health insurance plans is scheduled to go into effect in 2020. Trump has not mentioned this tax specifically but repeal of the ACA would presumably include repeal of the ‘Cadillac tax.’
Medical device tax – As part of ACA repeal, Trump’s plan would apparently envision repeal of the medical device tax.
Comment – Repeal of the ACA would also bring about repeal of the individual shared responsibility requirement, the employer shared responsibility requirement, the Code Sec. 36B premium assistance tax credit, the Health Care Marketplace, the SHOP Marketplace, and more.”
“During the campaign, Trump indicated that one direct result of lowering the corporate income tax rate would be to make US companies more competitive worldwide, as well as keep US companies onshore.
During the campaign, Trump proposed to provide a deemed repatriation of corporate profits held offshore at a ‘one-time’ reduced tax rate.”
LAME-DUCK TAX LEGISLATION
“A number of popular but temporary tax breaks (known as ‘extenders’) are scheduled to expire after 2016, unless extended or made permanent by the lame-duck Congress. Energy incentives make up a good portion of these expiring incentives.
For individuals, extenders expiring after 2016 include, among others:
- Higher education tuition and fees deduction;
- Code Sec. 25C nonbusiness energy property credit;
- Mortgage debt forgiveness exclusion; and
- Mortgage insurance premium deduction.
For businesses, extenders expiring after 2016 include:
- Film, TV and live theater production expense elections;
- Mine safety equipment expense elections;
- Code Sec. 199 deduction for production activities in Puerto Rico;
- Three-year recovery for race horses; and
- Seven-year recovery for motorsports complexes.
Some energy extenders expiring after 2016 include:
- Additional depreciation for second generation biofuel plant property;
- Fuel cell motor vehicle credit;
- Energy efficient commercial buildings deduction;
- Code Sec. 199 deduction for independent oil refiners;
- Credit for new energy efficient homes;
- Second generation biofuel producer credit; and
- Incentives for biodiesel, renewable diesel and alternative fuels.
Projected Impact – The energy incentives were expected to be made permanent in year-end 2015 tax legislation. At the eleventh-hour, lawmakers decided on extending, rather than making permanent, many of the energy credits and deductions. Whether year-end 2016 tax legislation will merely extend them again or make them permanent remains to be seen. Budgetary pressures may encourage lawmakers to approve another temporary extension and punt the ultimate fate of these extenders to the new Congress in 2017.”
OTHER PENDING TAX LEGISLATION
“The ‘lame-duck’ Congress is also expected to address a number of tax bills that were approved by the House during the summer, as well as pass an omnibus spending bill to keep the federal government, including the IRS, open into 2017. Keeping with tradition, a year-end spending bill could include tax measures.
The House passed the bipartisan Empowering Employees through Stock Ownership Bill (HR 5719) shortly before recessing in the fall. The bill would allow an employee to elect to defer, for income tax purposes, income attributable to certain stock transferred to the employee by an employer. An identical Senate bill, Sen. 3152, was introduced in July.”
“Also shortly before Congress recessed, the Senate Finance Committee unanimously passed the bipartisan Retirement Enhancement and Savings Bill of 2016, a measure that would make changes to the required minimum distribution rules for tax-favored employer-sponsored retirement plans and individual retirement accounts (IRAs).
Before year-end, some tax bills may be taken up in the House and Senate either as standalone bills or as parts of larger tax bills. A sample of these bills includes:
- The Louisiana Flood and Storm Victims Devastation Bill, which provides emergency tax relief for persons affected by severe storms and flooding in Louisiana.
- The Support Small Business R&D Bill, which would expand knowledge resources available to startups and small businesses in connection with their using the research and development (R&D) tax credit.
- The Middle-Income Housing Tax Credit (MIHTC) Bill of 2016, which would provide tax credits to encourage development of affordable housing.
In September, Congress approved and President Obama signed a continuing resolution to fund the federal government, including the IRS, through December 9, 2016. The continuing resolution generally funds the IRS at current levels. Congress has been unable to agree on a fiscal year (FY) 2017 budget for the IRS. As December 9th approaches, lawmakers will likely pass an omnibus spending bill to cover all federal agencies for the remainder of the 2017 fiscal year.”
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