New Year, New Tax Law? A Tale Of Two Tax Plans
January 03, 2017
As we begin the New Year with a new administration, President-elect Donald Trump has proposed significant changes in the federal tax policy affecting both individuals and businesses. However, many of the proposals summarized below lack technical details to explain how the specific provisions would operate. None of the proposals can become law until Congress approves and Congress has their own ideas for tax reform.
- Consolidate the current seven individual tax brackets, which currently top out at 39.6%, into three brackets of 12%, 25%, and 33%.
- Retain the existing rules and rates for capital gains and qualified dividend income and adapt them to the proposed tax brackets.
- Increase the standard deduction to $15,000 for single filers and $30,000 for married filing joint filers, indexed for inflation thereafter.
- Eliminate the personal exemption and the head of household filing status.
- Repeal the 3.8% Obamacare tax on investment income.
- Repeal the alternative minimum tax.
- Implement a cap on the amount of itemized deductions at $100,000 for single filers and $200,000 for married filing joint filers. The Trump Plan has not specified how it would implement this decrease, but there are assumptions that the itemized deduction phase-out rate will increase from the current 3% to 6% and the tax value of itemized deductions, other than charitable contributions and mortgage interest, will be subject to a new limitation of 10%.
- Establish new childcare related tax provisions - above the line deductions for children and elder care expenses for a dependent. The deduction would be phased out for taxpayers with total income over $250,000 for single filers and $500,000 married filing joint filers. The Trump Plan also offers credits (“spending rebates”) for childcare expenses to lower-income taxpayers through the Earned Income Tax Credit. The spending rebates 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.
- Establish new savings account, Dependent CARE Savings Accounts (DCSAs), for children (including unborn children) or elderly dependents. The savings accounts will have an annual contribution limit and the government will provide a 50% match of contributions.
- “Carried interest”, popular with real estate promoters and hedge fund executives, would be taxed at ordinary rates. This income is currently taxed at 20%, the current top rate for capital gains.
- Repeal of the federal estate and gift tax. The unified federal estate and gift tax exemption is scheduled to be $5.490 million for 2017.
- Disallow a “stepped up basis” to shelter otherwise taxable gains under the income tax. Presently, any asset that passes through an estate receives a tax basis equal to the date of death value, a significant tax advantage when the asset is sold by the heirs.
- Lower the business tax rate to 15% and eliminate the corporate alternative minimum tax. The Trump Plan does not define business tax; however, various interpretations identify business tax as the corporate tax structure. Additionally, it has been construed that owners of pass-through entities could elect to be taxed at a flat 15% rate on their pass-through income rather than be taxed under the regular individual income tax rate.
- Eliminate the domestic production activities (Section 199) deduction and all other business credits, except for the research and development credit.
- Certain corporate taxpayers who are engaged in manufacturing in the United States may elect to expense capital investment (i.e. equipment, structures, and inventory) in lieu of depreciating them over time and may continue to deduct interest expense as provided by the current rules.
- Increase the cap for the employer-provided day care tax credit from $150,000 to $500,000 and reduce the recapture period from 10 to 5 years.
- Allow repatriation of corporate profits held off shore for a one-time tax of 10%.
In addition to Trump’s way to reforming taxation, the House Republicans have also proposed a tax plan named “A Better Way” with many similar features. Some significant differences between the plans include:
- Allowing all businesses a full and immediate write-off of business tangible and intangible assets.
- Eliminating business interest expense deductions, with exceptions.
- Some potential elimination of tax-deferred “1031” exchanges of property according to some observers.
It remains to be seen which of these proposals, if any, will be enacted into law, or if enacted into law, when they would take effect. We will continue tax planning with the current tax structure. Most likely, if any of these proposals are adopted by Congress, they would not become effective until 2017. Of course, California may or may not conform to any or all of these proposals.
Please contact us if you have questions.