The Trump administration, through Treasury Secretary Steve Mnuchin and U.S. National Economic Director Gary Cohen, recently provided a brief outline of the much-anticipated tax reform and relief proposals it intends to pursue later this year.
Although Secretary Mnuchin described the plan as “the biggest tax cut and the largest tax reform in the history of our country,” and said it would have a significant impact on how businesses and individuals pay their taxes, the plan is, well, short on actual details.
Let’s look at what’s been proposed for individuals and businesses. Many of these proposals call for dramatic tax cuts for individuals and businesses, and are reminiscent of concepts promoted by Trump’s presidential campaign.
Tax Proposals That Affect Individuals
- The highest marginal rate would be reduced from 39.6% to 35%, and the current seven brackets would be reduced to three (10%, 25% and 35%). The proposal does not provide the breakpoints for these brackets.
- The net investment income tax of 3.8% would be repealed.
- The alternative minimum tax would be repealed.
- The standard deduction would be doubled and most itemized deductions, excluding home mortgage interest and charitable contributions, would be disallowed.
- The estate tax would be repealed.
Tax Proposals That Affect Businesses
- The highest marginal corporate income tax rate would decrease from 35% to 15%.
- Business income from “pass-through” entities (e.g., LLCs, partnerships and S corporations) would be taxed at a rate no higher than 15% (vs. 39.6% currently).
- There would be a strategic change from the current taxation of worldwide income to a territorial approach.
- Corporations would be allowed to repatriate offshore earnings to the U.S. at a low one-time income tax.
Who Will Reap the Benefits of the Proposed Tax Law Changes?
Practically every corporation and owner of a pass-through entity, large or small, that is profitable would reap some benefit from these business proposals, and the benefits could be substantial. Reducing the highest rate on business income to 15% could lower a business’s federal income tax liability by up to 62%!
High net worth taxpayers would most likely see their income tax liabilities decrease. Additionally, those families with taxable estates (e.g., married couples with joint net worth in excess of $10,980,000) would obtain significant estate tax benefits, allowing family wealth to transfer to children and grandchildren with no shrinkage from estate tax.
For low and middle income taxpayers, the outlook is mixed. The doubling of the standard deduction will simplify or eliminate tax return filing for many of these taxpayers, but the loss of certain deductions (e.g., medical expenses, state and local income taxes, unreimbursed employee business expenses) could mitigate the benefit of lower tax rates, or even increase their taxes. We won’t know for sure until the proposed tax brackets are released.
Some Hurdles Might Stand In the Way
Politicians from both sides of the aisle have been in agreement that the U.S. tax code – consisting of a staggering 10 million+ words – is cumbersome and overly complicated, and many of President Trump’s proposals would succeed in making the law simpler. However, making the code both “fair” and “simple” could prove to be an impossible task.
Questions exist whether this plan could be revenue neutral (the administration hopes that tax relief will stimulate business activity and actually increase tax revenues). Additionally, even though most income tax is paid by high income taxpayers (and logically the majority of benefits would fall to them), providing tax relief to wealthy taxpayers at a time when the national debt is almost $20 trillion may be a tough sell. And while the estate tax provides relatively little tax revenue, its outright repeal could be problematic for the same reasons.
As the Trump administration continues to receive “friendly fire” from fellow Republicans and Democrats alike, it will be interesting to see how these proposals evolve in the House and Senate later this year.
What’s Next for You, the Taxpayer?
Our tax department is monitoring potential tax law changes that might down the pipeline. In the meantime, we continue to help clients take advantage of every possible way to minimize their tax liability. Need help? We’re here. Call Paul Wallace, CPA, CFP, at 800.899.4623 or contact us online to evaluate your tax situation and plan for what’s coming down the road.