For months we have heard President Trump’s proposed changes to our country’s income tax code, but the timing and extent of such proposals are unclear. While it seems little progress has been made in Congress, the White House has issued a fact sheet titled “2017 Tax Reform for Economic Growth and American Jobs,” which outlines what we might expect to see in tax legislation. Although available details on some of the proposals are limited at this time, we do know the key points of the proposed plan, as well as the House Republican plan.
1) Corporation Tax Rate Reduction – President Trump has proposed a reduction in the highest corporation tax rate from 35% to 15%. This change is intended to spur growth in our economy and make the United States more competitive in a world environment. The United States currently has the highest tax rate among industrialized countries. The House plan is to reduce the corporate tax rate to 20%.
2) Individual Tax Rates – President Trump’s plan reduces the number of tax brackets from 7 to 3. The highest marginal rate is scheduled to be 35%. This is a 4.6% decrease from the current top rate of 39.6%. Additionally, the current 3.8% Net Investment Income Tax is scheduled to be eliminated. If you’ve been subjected to this additional tax in the past, then potentially the total decrease could be as high as 8.4%. The plan also includes a maximum rate on pass-through income at 15%. The House plan has three brackets at 33%, 25% and 12% with pass-through income at a maximum rate of 25%.
3) Standard Deduction vs. Itemized Deductions – With a doubling of the standard deduction and an elimination of many of the deductions normally taken on Schedule A (i.e. the deduction for state income taxes paid), fewer taxpayers will be itemizing their deductions, which will help low and moderate-income taxpayers. The two deductions protected under the President’s plan are the charitable contribution and mortgage interest deductions. The House plan includes similar provisions.
4) Alternative Minimum Tax – Each year many taxpayers find themselves subject to the Alternative Minimum Tax (AMT). Since 1982, taxpayers have been subject to two tax calculations and pay the higher of the two taxes. The AMT rules eliminate or limit some of the deductions claimed for regular tax (i.e. state income taxes and miscellaneous itemized deductions) and impose nearly a flat rate on the adjusted income. The proposed changes eliminate the AMT. The House plan includes similar provisions.
5) Tax Relief for Families – While there are not many details as of yet, there are proposals to provide additional relief for families with children and dependent care expenses and a proposed repeal of the death tax. The House plan includes similar provisions.
6) Border Adjustment Tax (BAT) – Under the proposal, imports would be subject to a 20% tax that would not apply to exports. Proponents of the BAT predict it would raise revenue to offset rate cuts and help prevent an erosion of the corporate tax base. The House plan does not include a BAT.
While the legislative branch of our government has not taken any formal action on the Trump tax proposal, it seems there is a majority that believes both the corporate and individual tax rates should be reduced, the repatriation of income needs addressed and that low-income households and families should be provided tax relief. Speaker Paul Ryan recently stated that “Republicans agree on about 80 percent of a tax reform package. But working through the details could take some time,” which means the likelihood of any tax legislation being retroactive to 2017 is unlikely.
Therefore, it is a reasonable assumption that most businesses and moderate to high-income individuals will most likely pay tax at a lower rate in the future than they currently are and should develop a tax plan accordingly. To manage your income taxes with this in mind, you should accelerate expenses into the current year and defer income to next year. This approach is consistent with traditional tax planning, but this year it may have an even bigger impact than in the past. We recommend you begin to identify and evaluate options to maximize your tax savings with the proposed reforms in mind.