Potential Impact to Individuals and Businesses Unveiled
Touted by the Trump Administration as the “biggest individual and business tax cut in American history,” the highly anticipated tax reform proposal was unveiled this week.
The plan, announced by Treasury Secretary Steve Mnuchin and National Economic Council Director Gary Cohn on April 26, 2017, is a broad outline of principles the Administration will advocate as part of tax reform legislation this year. Several of the stated goals of tax reform focus on decreasing the corporate tax rates, modifying personal tax rates, and eliminating many current deductions and incentives. The Administration will continue to formulate the detailed provisions of the tax plan and receive input from “stakeholders” (taxpayers – businesses and individuals) and House and Senate leaders throughout the month of May.
Below is a summary of the proposed tax principles that have been released to date.
- Reduced Number of Tax Brackets. Three tax brackets are planned (with rates of 10%; 25%, and 35%), down from the current seven brackets. No details regarding dollar amounts have been established yet for these brackets.
- Standard Deduction Would Double. The standard deduction is being nearly doubled – for a married couple filing jointly, this deduction would rise from $12,600 in 2016 up to $24,000. For those in the current 10% bracket – this, in effect, leads to a 0% tax rate for some.
- Repeal of the Alternative Minimum Tax (AMT). The AMT has impacted many taxpayers in recent years not only in the additional tax it collects, but also in the added complexity it creates in the individual tax return.
- Capital Gains Taxed at a 20% Maximum Rate. This is a modest reduction in the current tax rate on capital gains and differs slightly from what the House is considering for capital gains. This 20% rate will also apparently include “qualified dividends,” but this was not fully addressed in the rollout this week.
- Repeal of the 3.8% Medicare Surtax on Investment Income. This provision will be included in tax reform legislation, if it is not repealed first as part for the proposed ACA repeal and replace legislation that is expected to move to “Round 2” soon.
- Itemized Tax Deductions Curbed. Under the principles of tax reform unveiled, charitable contributions and mortgage interest would be retained as itemized deductions. The deduction for taxes (state income taxes and property taxes), however, is likely to be eliminated, and other itemized deductions are anticipated also to be removed.
- Retirement Plan Contributions Retained.
- Child Credit and Child Care Credit Retained.
- Elimination of the Estate Tax. The estate tax would be repealed as part of the Administration’s plan.
- Simplification. The Administration communicated their intent to simplify the tax return process for individuals. They have stated as a goal that they would like to “make filing taxes as easy as mailing a postcard.”
- Corporate Tax Rate Cut. The top tax rate will be cut to 15% (from 35% currently). The intention of this cut is to make U.S. companies more competitive with the rest of the world markets, as well as to stimulate economic growth.
- The 15% tax rate would apply for large corporations (C Corporations) as well as for pass-through entities (S Corporations and Partnerships). It is still unsure how the 15% rate will work for pass-through entities when the top individual tax rate is 35%. Mnuchin indicated they are trying to develop measures to prevent salary from being converted into pass-through income, which is taxed at lower tax rates. (When tax planning meets simplification, this often results in complication).
- “Territorial System” of Tax for Multinational Businesses. The plan principles released this week seeks the establishment of a territorial system of taxation, where U.S. multinational companies would be taxed only on income connected to the U.S. This system is more common in many other nations around the world.
- A One Time Repatriation Tax on Overseas Income. The tax was designed to bring income back to the U.S. and induce reinvestment through a slightly lower, one-time tax. The speculation is a 5% to 10% tax rate for repatriation, but nothing official was announced in this tax plan rollout.
A few items that were absent from the tax reform announcement included:
- The 100% Expensing Provision from the House Plan that was released last year. This House proposal would permit the immediate expensing of all property additions (except land). The fact that there was no mention of expensing in the official announcement this week does not mean it will not part of the tax plan, but it is assumed that details are still being worked on.
- The “Border Adjusted Cash Flow Tax” for Imports and Exports, which was also part of the House plan last year, was not addressed in this proposal, but details are expected to be forthcoming soon. The tax plan released does not cover whether the administration supports the export-based tax that was a key part of the House Republican blueprint (“A Better Way” released in 2016).
With so much yet to be resolved, the details of this plan will continue to be crafted among Congressional leaders and key stakeholders. The finalization of this tax reform legislation has a long way to go this year, and many items are expected to change or be added over the coming weeks and months. The various effective dates and transition rules have also not yet been determined. Please contact a Sikich tax advisor with any questions or clarifications on the prospects and applicability of these proposed items.
Additionally, it is expected that the next attempt at repealing and replacing the Affordable Care Act (ACA) could very well be the next order of legislative business for the Trump Administration. If ACA is repealed/replaced, it may boost the prospects for the tax reform proposal based on certain congregational budget and reconciliation rules. We will keep you advised of updates as they develop.