The following is a guest post from Vic Edwards, Tax Consultant with The CEO’s Right Hand
Well, whether you love him or hate him, Donald Trump will be our next President of the United States. Both candidates had their tax plans, but with the House and Senate still in Republican control, Trump now stands to be able to make the most changes in our country’s tax laws. Some of these changes could be dramatic. The following is an outline of Trump’s proposed changes.
Individual Income Tax
For individual income tax rates, Trump would collapse them from seven down to three brackets (12%, 25% and 33%). For married couples, the 12% rate runs to $75,000, the 25% one tops out at $225,000 and the 33% kicks in above $225,000. As part of lowering the tax brackets, itemized deductions would be capped at $200,000 and $100,000 for singles. Also, the standard deduction would be $30,000 for joint filers and $15,000 for single filers. Personal exemptions would be eliminated.
The present capital gains rates would remain the same with a maximum rate of 20%. Carried interest would be taxes at ordinary income tax rates. The 3.8% Obamacare tax on investment income would be repealed as well as the alternative minimum tax.
In relation to individual income taxes, Trump would like to introduce the Affordable Childcare and Eldercare Act. This allows individuals and families to deduct childcare and eldercare from their taxes and creates a Dependent Care Savings for both young and elderly dependents. There are a lot of other “bells and whistles” to this Act, but I will not cover them here in this article.
The present death tax would be repealed “technically”. However, there has been some back in forth on what Trump really means by this. He has suggested a 20% capital gains tax on assets held at death. However, there would be a $10 million provision or exemption for family farms and small businesses.
Trump plans to lower the existing top corporate tax rate from 35% down to 15% and eliminate the corporate alternative minimum tax and most business deductions (yet to be defined). The rate will apply to both small and large businesses. Business would be permitted to immediately deduct the cost of asset acquisitions. Those business that elect to deduct costs would not be permitted to deduct interest expense on any borrowing.
In the past, the Republican Congress has been leaning more towards a 20% corporate tax rate in discussing corporate inversions. So, Congress could either go with Trump’s rate or compromise to a rate of 17.5%. But keep in mind
Trump is also offering corporations a one-time 10% tax rate on all offshore profits that are repatriated to the United States.
One of the bigger potential changes under the Trump plan is the possible provision of a “unified business tax” rate of 15%. This means that “all” business income is subject to the 15% tax rate whether it is a C corporation, S corporation or a partnership income. On the pass-through entities (partnerships and S corporations), there is no guidance as to how this tax would be applied (i.e. at the pass-through entity level or on the individual tax return). It is possible that business owner pass-through entity income will be treated like “qualified dividends” and taxed at the 15% rate. However, this leaves questions about S corporation owners taking salaries.
Trump has a very favorable chance at getting most of this type of legislation passed with a Republican controlled Congress. Between his suggestions of simplification and lower tax rates, he is surely singing the same tune as most Republicans in Congress. But as with all good intentions, the devil is in the details (i.e. what is the meaning of “most” for the deductions business will not be able to deduct). This is where the most disagreements could occur. In general, Trump’s tax plan brings the United States closer to a flat tax for businesses and a hybrid flat/progressive tax for individuals.