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How Trump’s Win Will Affect Your Taxes

How Trump’s Win Will Affect Your Taxes
Is tax reform coming soon?

Donald Trump’s victory provides the opportunity to put his campaign proposals in place.  Republicans retained control of both Houses of Congress, so it is likely that Trump's proposed tax reform could become law.  The Republican House had come out with their own tax reform proposals known as, “A Better Way” Blueprint in June, 2016.

Proposals for Individuals
The current Tax Code has no less than seven different tax rates ranging from 10% to 39.6%. Trump's plan contemplates only three tiers for married filing joint (MFJ) taxpayers:

  • 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 half of the MFJ brackets. Trump's proposed tax brackets align with the “A Better Way“ Blueprint espoused by Paul Ryan and the Republican House caucus.

Mr. Trump's plan does not exactly match the "A Better Way" Blueprint.  Trump proposes keeping the capital gains tax at the current maximum rate of 20%.  In contrast, the “A Better Way” Blueprint would tax only 50% of dividends, capital gains and interest from stocks and mutual funds.  Both Trump and the “A Better Way” Blueprint would repeal the 3.8% Net Investment Income Tax under the Affordable Care Act and the Alternative Minimum Tax (AMT). Under Trump, the standard deduction for joint filers would increase from $12,600 to $30,000. The deduction for single filers would be $15,000. The “A Better Way” Blueprint calls for a larger standard deduction of $24,000 for joint filers and $12,000 for single filers.  Both Trump and the “A Better Way” Blueprint call for the elimination of personal exemptions and the Head of Household filing status.  Mr. Trump would also limit itemized deductions to $200,000 for married couples and $100,000 for single filers. The “A Better Way” Blueprint would end all itemized deductions except mortgage interest and charitable contributions.

Mr. Trump proposes increased tax deductions for child and eldercare expenses, including a refundable Earned Income Tax Credit for those expenses.  He would also increase the eligibility threshold for these tax deductions.

Estate Tax
Mr. Trump proposes the elimination of estate taxes, except for capital gains held until death which exceed $10 million. There would also be an unspecified exemption for small businesses and family farms. To prevent abuse, Trump's proposal would disallow contributions of appreciated assets to private charities started by the deceased or their relative.  The “A Better Way” Blueprint would eliminate the estate (death) and generation-skipping transfer tax.

Corporate Taxation
Trump advocates a flat 15% corporate income tax on large and small corporations as well as a repeal of the corporate Alternative Minimum Tax. The current maximum rate is 35%. This 15% rate would also apply to business entities taxed at the individual level, such as partnerships and S Corporations. The “A Better Way” Blueprint would reduce tax on S corporations and partnerships to 25%. The “A Better Way” Blueprint would reduce corporate tax paid by corporations to 20%.  Mr. Trump has also advocated for a one-time 10% repatriation tax of corporate profits held offshore. The “A Better Way” Blueprint taxes accumulated foreign earnings at 8.75% to the extent held in cash of cash equivalents and 3.5% for others.

Mr. Trump also seeks to repeal most corporate tax credits save for the Research and Development Credit.  Trump advocates allowing manufacturing firms to make an election to expense capital investments but lose the ability to deduct corporate interest expense. This election is revocable 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, they must file amended returns which reflect the revised status. The “A Better Way” Blueprint allows immediate cost recovery for investments in tangible property (such as equipment and buildings) and intangible assets (such as intellectual property).  Land is not included in investments that would be eligible for cost recovery.  Under this regime, interest expense would only be deductible to the extent of interest income. Mr. Trump proposes to tax “carried interest” as ordinary income rather than at capital gains tax rates.  Mr. Trump has proposed an increase of the Section 179 fixed asset expensing to $1,000,000 for qualified small businesses.

Infrastructure
President-elect Trump seeks to harness market forces to help attract new private infrastructure investment through a deficit-neutral system of infrastructure tax credits. The “A Better Way” Blueprint has mentioned nothing in this regard.

The legislative process
There are significant differences between Trump's proposals and the “A Better Way” Blueprint.  So far, Republican fiscal conservatives have shown no reaction to the potential deficit associated with these tax cuts.  The strategic approach of the Democratic legislators is also unknown at this point.  Democrats may choose to filibuster legislation. Republicans would need a 60 vote majority to pass legislation.  But, legislation passed as part of budget reconciliation would require only a simple majority in the Senate.

While no one knows for sure how tax reform will play out, planning is essential. Communication with your Herbein advisors will put you on the path to “Succeed With Confidence” no matter the outcome.

For additional information, contact the author, Chuck Bezler at cabezler@herbein.com.