Eye on Reform: President Trump’s Proposed Tax Plan
On April 26, 2017, the White House shared the broad outlines of its plan for tax reform, calling it “The Biggest Individual and Business Tax Cut in American History.” President Trump’s stated goals for this plan are:
- growing the economy;
- creating millions of jobs;
- simplifying the tax code;
- providing tax relief to families (with a focus on the middle class); and
- lowering the business tax rate to make it one of the lowest in the world.
Few details of the plan are available, because the Administration has said that they are still being worked out with members of Congress and many different scenarios are being scored by the Department of Treasury. The White House is counting on the cost of many of their proposals to be offset by growth and the closing of “loopholes,” but have not identified many of the specific provisions they are targeting.
If the details of the plan do not offset tax savings with enough revenue to make it revenue neutral, it will likely have a built-in expiration date, like the tax cuts enacted during President Bush’s administration in 2001. Economists have said that such a “sunset provision” may limit the plan’s effect on business investment and employment. Additionally, members of Congress have expressed concern that the plan would increase the deficit. Consequently, many changes are expected before the plan becomes law.
Without knowing what dollar thresholds are expected to apply to the various tax brackets, or what compromises would be made as the plan is considered by Congress, it is still too early to determine how much you could save (or lose) if the plan is enacted. But whether you are the owner of a large corporation or file a 1040-EZ to report wages, something in the plan is likely to affect you, and this alert should help you understand which provisions those are.
Provisions Affecting Individuals and Pass-through Entities
President Trump’s tax proposal would significantly reduce the number of tax brackets that apply to individuals from seven to three (10%, 25% and 35%), would provide tax relief for families with child and dependent care expenses, and would eliminate both the Alternative Minimum Tax and the Net Investment Income Tax. The estate tax would also be repealed.
At Wednesday’s Press Briefing, Secretary of the Treasury Steven Mnuchin implied that the 15% tax rate proposed for corporations would also apply to individuals who operate small businesses as sole proprietorships or pass-through entities (partnerships and S corporations) subject to rules preventing the use of entities merely to reduce their tax rates.
The proposal would also simplify return preparation by doubling the standard deduction (to $25,400 for a married couple) and eliminating most itemized deductions, including those for medical expenses, state and local income taxes, real estate taxes and investment expenses. The deductions for charitable contributions and home mortgage interest would remain, but it is unclear whether they would be allowed instead of, or in addition to, the standard deduction.
Based on a statement by the Director of the National Security Council Gary Cohn that “…a married couple won’t pay any taxes on the first $24,000 of income they earn …” it appears likely that personal exemptions would also be eliminated.
While the Trump Administration’s plan calls for changing the corporate tax regime from one that taxes worldwide income to one that only taxes income earned in the U.S., the plan does not mention a similar change for individuals.
Who Benefits and Who Loses?
People with no children, who receive most of their income from their ownership of a business and/or investments, who live in a state that does not impose an income tax and who do not own real estate are most likely to benefit from the current proposal. In contrast, individuals who pay high state or local income and property taxes and are employees are among the most likely losers.
President Trump’s tax proposal would reduce the corporate income tax rate to a flat 15% rate, which would be a significant reduction from the current maximum effective rate of 35%.
The administration hopes that a 15% tax rate would serve the following purposes:
- encourage economic growth;
- make domestic businesses more competitive;
- attract new businesses; and
- reduce the incentive for corporate inversions (i.e., when corporations move abroad so that they pay a lower tax rate in another country).
The proposal advocates a one-time tax on profits currently held overseas, followed by the implementation of a territorial tax system. Besides raising revenue, the administration believes that this combination of provisions would encourage the repatriation of a significant amount of money by multinational corporations.
Neither the one-time tax rate on foreign profits, nor the tax base to which it would apply, has been announced publicly. There have been unofficial reports that the tax might be collected over a period of up to ten years.
The Administration has not indicated how they would determine the income subject to a territorial income tax, and Secretary Mnuchin has indicated that it does not believe that the type of border adjustment tax included in the House Republican tax reform blueprint is workable as currently proposed.
Which parts of the proposed Trump tax plan would be most beneficial to you – and which parts would be neutral or even detrimental? Our teams of tax and advisory professionals are keeping a close eye on negotiations surrounding President Trump’s tax proposal.
Stay tuned for more insights as Congress considers tax reform and rate reduction – and reach out to your local Cherry Bekaert advisor anytime to have a conversation about what Trump’s tax plan could mean for your unique tax situation.