Donald Trump’s election as the 45th President of the United States on November 8 is expected to bring changes to the tax laws for individuals and businesses. President-elect Trump had made tax reduction a centerpiece of his economic plans during his campaign, saying he would, among other things, propose lower and consolidated individual income tax rates, expand tax breaks for families, and repeal the Affordable Care Act. As the next few weeks and months unfold, taxpayers will learn more about Trump’s tax plans.
More immediately, the results of the November 8 election may impact year-end 2016 tax planning, because of last-minute provisions soon expected to be passed by the “lame-duck” Congress—or by the new Congress early in 2017.
Further, the 115th Congress, which will convene in January 2017, will find the GOP in control of both the House and Senate, therefore allowing Trump to more easily move forward his proposals. It remains to be seen, however, what compromises will be necessary between Congress and the Trump Administration to find common ground. And beyond moving forward individual tax proposals, it also remains to be seen whether they can be packaged within a mandate for broader “tax reform” and “tax simplification.”
FIRST 100 DAYS
During the campaign, Trump released an outline detailing his plans for his first 100 days in office. Within the “100-day plan presentation,” Trump listed several tax proposals to immediately work with Congress on enacting:
- The Middle-Class Tax Relief and Simplification Act—According to Trump, the legislation would provide middle-class families with two children a 35 percent tax cut and lower the “business tax rate” from 35 percent to 15 percent. During the campaign, Trump described the plan as “an economic plan designed to grow the economy 4 percent per year and create at least 25 million new jobs through massive tax reduction and simplification.”
- Affordable Childcare and Eldercare Act — A proposal described by Trump during the campaign that would allow individuals to deduct childcare and elder care from their taxes, incentivize employers to provide on-site childcare and create tax-free savings accounts for children and elderly dependents.
- Repeal and Replace Obamacare Act — A proposal made by Trump during the campaign to fully repeal the ACA.
- American Energy & Infrastructure Act—A proposal described by Trump during the campaign that “leverages public-private partnerships, and private investments through tax incentives, to spur $1 trillion in infrastructure investment over 10 years.”
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.
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|
|Current Rates||Trump/GOP Rates||Joint Filers: Blueprint||Single Filers: Blueprint|
|10% 15%||0%/12%||up to $75,300||up to $37,650|
|25% & 28%||25%||up to $231,450||up to $190,150|
|33%, 35% & 39.6%||33%||above $231,450||above $190,150|
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),
Alternative Minimum Tax (AMT)
During the campaign, Trump proposed to eliminate the alternative minimum tax (AMT).
Net Investment Income (NII) Tax
During the campaign, Trump proposed to repeal the Affordable Care Act (ACA). Repeal of the ACA would include repeal of the 3.8 percent net investment income (NII) tax.
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.
Corporate Income Tax
During the campaign, Trump proposed to lower the business tax rate to 15 percent and eliminate the corporate alternative minimum tax.
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).
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 expense, Trump proposed during the campaign that manufacturing firms would be able to immediately deduct all new investments in the business.
Any changes to the tax law will obviously need the approval of Congress so it remains to be seen which of these proposals will become law. However, if you would like to discuss how any of these would impact you, please feel free to contact your MarksNelson professional.