Filed under: Private Business, Tax Compliance & Planning

By Rick Cooley, CPA

Whether you love or hate the United States’ 45th President, Donald J. Trump, all taxpayers should prepare for big changes in tax year 2018.

Though President Trump talked a great deal about tax reform while on the campaign trail, we are all anxiously awaiting the tax reform legislation that will emerge from his campaign’s tax talking points and slogans.

So what could tax reform look like, courtesy of Mr. Trump and the 115th Congress? Based on Mr. Trump’s tax reform campaign pledges, we can expect at least some of the following proposals to wind up in tax reform legislation:

For individuals:

  • Tax rate reductions. Reduce the top individual tax rate from 39.6% to 33%. Keep capital gains and dividends tax rates at the current level with a maximum rate of 20%.
  • Tax carried interests at ordinary income tax rates. Long a goal of the Obama administration, this Trump proposal would tax the so-called carried interest investments of venture capitalists at ordinary income tax rates, versus the lower capital gains tax rate.
  • Repeal of Alternative Minimum Tax (AMT). Outright repeal of the AMT, which now hits approximately 40% of individual income tax filers.
  • Repeal of the 3.8% Net Investment Income Tax (NIIT). Repeal of the main funding source for the Affordable Care Act, or “Obamacare.” This repeal could come as part of tax reform, or as part of the promised Republican overhaul of health care.
  • Replace personal exemptions with a new above-the-line deduction for care of dependent children or elders. For taxpayers with income up to $500,000, a new above-the-line deduction, directly reducing their gross income, would be an up to $5,000 deduction for dependent children under age 13.
  • New limit on itemized deductions at $200,000. A cap of $200,000 of all otherwise allowed itemized deductions for mortgage interest, state income and sales taxes, real estate taxes and charitable contributions.
  • Establish new Dependent Care Savings Accounts. Allow pre-tax savings accounts for funding dependent care expenses that could be used for educational expenses once the dependent reaches age 18.
  • Increase the Standard Deductions. Increase the standard deduction to $15,000 for single filers and $30,000 for married couples.
  • Repeal the estate tax and replace it with a capital gains tax (no basis step up at death) but with a $10 million exemption. Replace the federal estate tax with a capital gains tax at current capital gain rates of up to 20%. It is not clear if the tax would be due at death or when beneficiaries sell inherited assets, but the latter appears consistent with Mr. Trump’s stated goal of eliminating the estate tax.

For businesses:

  • Reduce top corporate tax rate from 35% to 15%. A 60% reduction in the corporate tax rate, but at the cost of losing most corporate tax credits (see below).
  • Repeal corporate AMT. Once again, Mr. Trump has proposed a complete repeal of the AMT.
  • One-time repatriation of off-shore earnings at a 10% tax rate. A one-time opportunity for international companies to bring “trapped” foreign earnings back to the US at a bargain tax rate. Estimates of “trapped earnings” top $2 trillion, so this would produce a one-time windfall for the Treasury.
  • Limit many corporate tax credits, except for the research and development credit. In exchange for an almost 60% reduction in the top corporate tax rate, corporations would no longer have the Domestic Production Activities Deduction, or any other business credits, except the Research and Development credit.

As you can see, Mr. Trump has proposed significant changes to both individual and corporate taxation. But Presidents don’t legislate – Congress legislates. The good news for Mr. Trump is that there are a number of similarities between his tax reform proposals and those put forward in Congressman Ryan’s “A Better Way” (ABW) in June of 2016:

  • Reduced individual and corporate tax rates.
  • AMT repeal.
  • Repeal of all Obamacare taxes, including the Net Investment Income Tax of 3.5%.
  • Eliminate itemized deductions, except for mortgage interest and charitable contributions.
  • Elimination of the estate tax.

With Mr. Trump and Mr. Ryan’s tax reform proposals sharing so much common ground, the likelihood of significant tax reform is high. When will this happen? Likely as part of the Budget Reconciliation process this Fall for the 2018 Federal budget. In fact, Congress has already set aside time on the Congressional calendar to deal with tax reform at that time.

Clark Nuber will monitor the progress of Mr. Trump’s tax reform proposals and Congressional legislation. We will keep you up to date.

It’s going to be yuge!

© 2017 Clark Nuber PS All Rights Reserved

This article or blog contains general information only and should not be construed as accounting, business, financial, investment, legal, tax, or other professional advice or services. Before making any decision or taking any action, you should engage a qualified professional advisor.