How the Candidates Tax Plans Could Affect Your Bottom-Line

Election Sneak Peek
How the Candidates Tax Plans Could Affect Your Bottom-Line

As the presidential election season comes to a close, there has been no shortage of divergent opinions between GOP nominee Donald Trump and Democratic nominee Hillary Clinton; their tax plans are no different. Each candidate has laid out their tax plan on their website, but what does it all mean?

Trump’s Plan for Individuals
The current Tax Code has no less than seven different tax rates ranging from 10% to 39.6%. Under Trump’s plan, the tiers would be reduced to three tiers of 12% for married taxpayers making up to $74,999; 25% for married taxpayers making between $75,000 and $224,999; and 33% for married taxpayers making $250,000 or more. Tax brackets for single taxpayers would be one-half of the married filing joint (MFJ) brackets.

Furthermore, Trump proposes keeping the capital gains tax at the current maximum rate of 20%, repealing the 3.8% Net Investment Income Tax under the Affordable Care Act and repealing the alternative minimum tax. Under Trump, the standard deduction for joint filers would increase from $12,600 to $30,000. The Trump Plan also calls for personal exemptions and the Head of Household filing status to be eliminated.

Clinton’s Plan for Individuals
In Clinton’s plan, no mention is made to consolidate the tax brackets. She has, however, advocated for the “Buffet Rule.” This is the same rule that President Obama proposed in 2011. Under the rule, taxpayers earning over one million dollars would have a minimum tax rate of 30%. For taxpayers making over five million dollars per year, Clinton proposes adding a 4% “Fair Share Surcharge” to any other tax liabilities.

Estate Tax
Clinton also addresses the Estate Tax in her plan. She advocates returning to 2009-era parameters. This means that estates over $3.5 million would be subject to a tax of 45% and Gift Tax exclusions would be limited to $1 million and subject to a 45% tax rate. Clinton asserts that this would only affect four out of every 1,000 estates. Trump proposes eliminating the estate tax all together, however, capital gains held until death exceeding $10 million dollars would be subject to capital gains tax treatment. His assertion is that this would exempt many small businesses and family farms from a tax burden generated on assets that are not easily liquidated into cash. In order to prevent abuse, Trump proposes that contributions of appreciated assets to private charities started by the deceased or their relative be disallowed.

Corporate Taxation
Corporate taxation under a Trump Presidency would change dramatically. In his address to the Detroit Economic Club and the New York Economic Club, Trump advocated a flat 15% corporate income tax on large and small corporations as well as a repeal of the corporate alternative minimum tax. The current rate is 35%. He has also advocated for a one-time 10% repatriation tax of corporate profits held offshore. Another change proposed by Trump is repealing most corporate tax credits save for the Research and Development Credit.

For manufacturing firms, Trump advocates allowing the firm to make an election to expense capital investments but losing the ability to deduct corporate interest expense. This election can be revoked if the firm elects to do so within three years. After three years the election is permanent. If a firm does decide to elect out, the prior returns would have to be amended to reflect the revised status.

Clinton makes no mention of restructuring tax rates but instead discusses closing corporate tax loopholes and restricting corporate inversions.  Corporate inversions involve changing a corporation’s tax home (in most cases they change their home to Ireland) to avoid paying U.S. income taxes on corporate earnings. By eliminating a corporation’s ability to expatriate solely for the purpose of tax avoidance, she hopes to use the tax revenues to invest in U.S. infrastructure. To further discourage this type of inversion, Clinton proposes an exit tax on overseas profits. Under the current law, a U.S. corporation can defer paying taxes on overseas profits until they bring that money back into the U.S. Under the Clinton plan, those un-repatriated earnings would be taxed at the time the corporation gives up its U.S. identity.

Her plan also has ideas on how to eliminate corporate “earnings stripping.” A corporation can, under the current law, set up a foreign based subsidiary in a tax favorable country and pay a management fee or other type of expense to shift profits from the United States to a lower-taxed country. Clinton advocates closing that loophole either by a Congressional vote or by using the power of the Treasury Department.

The Role of Congress
All of this is a lot to take in. Since Congress is ultimately responsible for the Tax Law, neither plan will be likely to be approved without buy-in from the next Congress. Regardless of who wins, the current tax law is likely to see at least some change. How much change? No one knows for certain, but by talking to your advisors at Herbein you can be sure to “Succeed With Confidence” no matter the outcome.

Article written by Michael G. Radich, CPA, MST.