President Trump’s tax plan, which he termed “the biggest individual and business tax cut in American history” was unveiled in late April. Treasury Secretary Steven Mnuchin said the plan was to make U.S. companies “the most competitive in the world” while cutting and simplifying personal taxes. Gary Cohn, director of the National Economic Council, called this initiative a “once-in-a-generation opportunity to do something really big”. The plan, currently a one-page outline, is long on goals and just the starting point for a long summer of negotiations.
Impact on individuals
For personal tax returns, Trump would reduce the number of tax brackets to three: 10%, 25%, and 35%. Currently, there are seven personal tax brackets, from 10% to 39.6%. Thus, this plan would reduce the tax rate paid by people with the highest incomes, from 39.6% to 35%. Depending on how the brackets fall, other taxpayers might go from a 15% rate to either a 10% rate or a 25% rate, or from a 28% rate to either a 25% rate or a 35% rate. The plan does not say where these brackets begin and end.
In the interest of simplification, the Trump plan also calls for doubling the standard deduction. In 2017, the standard deduction is $12,700 for married couples filing jointly, $6,350 for single taxpayers and married individuals filing separately, and $9,350 for heads of households. If the standard deduction is doubled, under the Trump plan, the new numbers would be $25,400, $12,700, and $18,700, respectively.
What’s more, Trump’s plan promises tax relief for families with child and dependent care expenses. No details were included in the April announcement but during the 2016 Presidential campaign, Trump mentioned adding deductions for child care and for a dependent’s eldercare, which would be available to taxpayers with moderate incomes. He also mentioned rebates for child care expenses for certain lower-income taxpayers, through the earned income tax credit.
Consistent with the stated policy goal of simplification, the Trump plan calls for the elimination of most itemized deductions. Only mortgage interest and charitable deductions would be preserved. Most controversial among those deductions to be eliminated is the deduction for state and income taxes and real estate taxes. Many states have already led the outcry against this provision. The elimination could significantly impact those taxpayers in high taxed states, such as CA, NJ, and NY. Mnuchin countered that the Federal government’s primary role is not to subsidize states. The doubling of the standard deduction and the repeal of the AMT is intended to soften the tax impact of the loss of this deduction.
States were also concerned that the Trump plan contemplates eliminating the exemption for municipal bond interest income. This provision, however, was not specifically mentioned in the plan.
Regardless of whether people itemize or take the standard deduction, they apparently still would be able to deduct contributions to retirement plans, if they qualify. The tax plan outline does not specifically mention these tax benefits, but Cohn said that “retirement savings will be protected.”
Taxes to be repealed
The Trump plan also calls for the repeal of the 3.8% surtax on net investment income, payable by some high income taxpayers. Counting this surtax, individuals currently pay as much as 43.4% on investment income, and up to 23.8% on long-term capital gains. Accordingly, the maximum long-term capital gains tax rate of 20% would be maintained.
The complex alternative minimum tax (AMT) also would be repealed. This tax now impacts many people who pay large amounts of state and local tax, effectively devaluing those deductions. Depending on the circumstance, repeal of the AMT could offset the loss of itemized deductions for taxes paid.
In fact, with the elimination of most deductions and the Alternative Minimum Tax, some taxpayers with large state and local tax deductions that are currently paying 28% AMT on their income could see their taxes rise to 35% on the same income.
In addition, as was discussed during the campaign, the federal estate tax would be repealed. In 2017, estates owe 40% tax on assets over $5.49 million, effectively allowing couples to pass on nearly $11 million to heirs, tax-free. It is anticipated that the repeal would cover gift taxes as well. The Trump outline doesn’t state whether the law also would impose an income tax on appreciated assets held by the decedent, either at death or on a future sale. During the campaign, Trump indicated that there would be some form of income tax on large holdings of appreciated assets in estates.
Breaks for business
A major part of the Trump tax plan is the reduction of the corporate income tax to no more than 15%. Presently, that rate goes up to 35%. Mnuchin has indicated that this new 15% rate also would apply to business income from S corporations, partnerships and LLCs. Under current law, income from these forms of business is passed through to individual owners and taxed at ordinary income rates, up to 39.6%. The pass-through tax reduction could have a significant impact on the choice of entity selection, as it is not yet clear that this provision would apply to sole proprietors, as well. It is assumed that, as per past statements, there would be a second level tax on distributions from the pass-through entity. It is also unclear how “compensation” from these entities will be taxed.
There also would be a new “territorial tax system to level the playing field for American companies.” No details are given, but the term generally means that companies pay taxes on income only in countries where it is earned. This system could eliminate the Subpart F income regime that currently taxes certain offshore income (including passive income, such as interest, dividends, etc.)
In addition, the Trump plan calls for a one-time tax on trillions of dollars held overseas. Trump previously has called for a 10% tax on corporate off-shore profits that are deemed to be repatriated to the U.S.
A notable item missing from the Trump plan is the controversial border tax adjustment. This was a welcome omission for some, including the retail apparel sector. It appears that the omission was intentional as the White House is not signaling its approval of this provision. House Republicans have announced that the border tax is still on the table. So, it may not be “dead” just yet. Elimination of corporate deductions, including interest, was not specifically mentioned in the plan, although such had been a hallmark of previous proposals. While the elimination of the special treatment of carried interests was not specifically addressed, separate legislation to eliminate it was reintroduced in the House on May 2.
The Administration plans to provide a more detailed plan around mid-June. Going forward, the Trump administration will hold “listening sessions” with “stakeholders” to receive comments. Meanwhile, officials will work with Congressional leaders to flesh out this outline and develop detailed legislation.
Citrin Cooperman’s Federal Tax Policy Team
As this Trump tax plan moves through the legislative process, Citrin Cooperman’s Federal Tax Policy Team (FTPT) will continue to keep our clients abreast of the constantly changing legislative and political landscape. This team will examine new tax legislation as it is enacted, in order to identify strategies to help our clients best manage the complexities of their tax situations.
With a highly knowledgeable and experienced team, the FTPT is uniquely qualified to assist as our clients tackle key tax issues. The team’s primary focus is on President Trump’s administration, subsequent legislation, and helping our clients learn about, understand, and plan under any new tax legislation.