During the 2016 presidential campaign, President Donald Trump proposed a number of changes to the tax code. Now that he is in office, backed by a Republican-led Congress, some of these ideas may become law and they are likely to become substantive and far reaching.
Citrin Cooperman’s Federal Tax Policy Team
We are happy to introduce the creation of Citrin Cooperman’s Federal Tax Policy Team (FTPT). Born out of the need to keep our clients abreast of the constantly changing legislative and political landscape, the 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.
Despite the fact that there is a huge disparity between campaign rhetoric and actual legislation, Trump’s campaign website provides an idea of what could become law, as early as this year. Here are a few of the more significant aspects of President Trump’s Tax Plan.
Trimming the tax brackets and rates
Currently, the federal income tax has seven tax rates, ranging from 10% to 39.6%. Trump wants that cut to three tax rates, with the highest rate being 33%.
The current capital gains tax rate structure would be retained, preserving the 20% maximum tax rate on long term capital gains. Carried interest, however, would be taxed as ordinary income.
Eliminating some taxes
If the Affordable Care Act is repealed, the 3.8% Net Investment Income Tax (the so called “Obamacare” tax) would be repealed. In addition, the Alternative Minimum Tax (AMT) would also be repealed.
A taxpayer’s liability is contingent upon how taxable income is computed. Under the Trump proposal, personal exemptions and the head-of-household filing status would be eliminated. As an offset, the standard deduction, which is now $6,300 for singles and $12,600 on joint returns, would be increased to $15,000 (single) and $30,000 (joint).
Such a change would encourage more taxpayers to take the standard deduction, rather than itemizing. Trump would cap the total of itemized deductions at $100,000 a year for single filers, or $200,000 on joint returns. This would significantly affect taxpayers in states with high income tax obligations, as well as philanthropic taxpayers seeking deductions for charitable contributions.
New childcare provisions
The Trump Plan does add a deduction in computing adjusted gross income for child care (for children under age thirteen) that will be capped at the average cost of child care in the state, based on the age of the child. There would also be a deduction for eldercare for a dependent. This deduction will not be available to taxpayers with total income over $500,000 for married-joint filers and over $250,000 for single filers.
The childcare deduction would apply to taxpayers who use stay-at-home parents or grandparents, as well as those who employ paid caregivers.
The eldercare exclusion would be capped at $5,000 per year. The cap would increase each year by the rate of inflation.
The Trump Plan would also add rebates for childcare expenses for certain low-income taxpayers through an Earned Income Tax Credit.
Lastly, all taxpayers would be able to establish Dependent Care Savings Accounts for the benefit of specific individuals, including unborn children.
Business tax changes
Some of the business tax proposals are:
- A drop in the top corporate income tax rate from 35% to 15%.
- Elimination of the corporate AMT.
- A one-time 10% tax on corporate off-shore profits that are deemed to be repatriated to the U.S.
- A 15% tax on income retained in a business by pass-through entities such as S corporations and partnerships. Subsequent distributions of that income for large pass-throughs (as yet, undefined) would be taxed as dividends.
- U.S. manufacturers could elect to expense all capital investments. If the election is made, then the corporation would not be able to deduct its interest expense.
- Many corporate tax expenditures will be eliminated. It is not clear at this time what specific expenditures would be repealed, but the Research and Development credit would be retained.
Death of the “Death Tax”
Trump has called for the abolition of the federal estate tax. It is reasonable to assume that the repeal will be extended to gift and generation-skipping transfer taxes, as well. However, there will no longer be an increase in basis for the assets held at death. Instead, the assets held until death with a value over $10 million (most likely $5 million per decedent) will be subject to tax. It is unclear whether there is immediate taxation of these assets or if the assets are taxed only when they are sold.
In addition, the $10 million (or $5 million) exemption would be increased for small businesses and family farms. Action plan
Citrin Cooperman Federal Tax Policy Team will follow the legislative process closely and keep our clients apprised of the potential changes and consequences of the tax proposals. We emphasize, however, that these changes are only proposals at this time and that there are other tax law change proposals being introduced by the members of Congress, which the Federal Tax Policy Team is following closely. If you have any questions regarding current or proposed policy, please do not hesitate to reach out to a FTPT advisor.