A brief overview of President-Elect Trump's Proposed Tax Plan

President-elect Trump will take office on January 20, 2017. One of the first action items on his list – tax reform. With Republican control of both the Senate and the House, most are certain that tax reform is imminent. His proposal affects individual, estate, gift and business tax legislation.The Trump proposal calls for the reduction of the number of individual income tax brackets from the current seven to three: 12%, 25% and 33%, reducing the top 39.6% rate by 6.6%. However, the new top rate is imposed at a much lower income level than current law ($225,000 vs $425,400 if MFJ). Low-income Americans (less than $30,000 if MFJ) will have an effective tax rate of 0%. Capital gain rates will remain the same at 10%, 15% and 20%, corresponding with the suggested three tax brackets.The proposal calls for an increase of the standard deduction to $15,000 for single filers and $30,000 for joint filers, but both the personal exemptions and the head of household filing status will be eliminated. The increased standard deduction is expected to drastically reduce the number of taxpayers who itemize their deductions on their tax returns, as the standard deduction will be greater than many filers’ yearly itemized deductions. For those Americans who will still itemize, the plan limits itemized deductions to $200,000 for joint filers and $100,000 for single.In addition to the lower marginal rates and increased standard deduction, the President-elect plans to eliminate the alternative minimum tax (AMT) and the net investment income tax enacted as part of the Affordable Care Act (ACA). Trump also plans to eliminate the federal gift, generation-skipping, and estate taxes. He proposes that capital gains held until death and valued over $5 million for single filers and $10 million for joint filers will be subject to tax.The Trump plan addresses the current complicated child and dependent care expense credit. Trump proposes an alternative to the credit in the form of a nonrefundable above-the-line deduction for children under age 13 and eldercare for a dependent for up to $5,000. The child care expenses will be limited to four children. The deduction would be capped by state for the average care of cost. Unlike the current credit, the proposed change will be provided to families who use stay-at-home parents or grandparents as well as those who use paid caregivers. The exclusion will not be available to taxpayers with income over $500,000 for joint filers or $250,000 for single filers. The plan provides an increase in the earned income tax credit (EITC) for low-income, working parents who would not benefit from the deduction.Further, the President-elect plans to allow taxpayers to establish tax-favored Dependent Care Savings Accounts (DCSAs) related to child and dependent care expenses. The total annual contribution would be limited to $2,000.The proposed Trump plan will lower the top corporate tax rate from 35% to 15%, and eliminate the corporate alternative minimum tax. In addition to corporations, owners of sole proprietorships, partners of partnerships and shareholders of S-corporations will also have the option to be taxed at a flat 15% rate on their income from these entities rather than at individual income tax rates. This rate differential will be pivotal for many taxpayers, and if passed, will be a large planning area to consider for the future.The plan provides a deemed repatriation of corporate profits held offshore. Earnings held in cash would be taxed at a one-time 10% rate and other earnings at a 4% rate. This one-time tax will be payable over a ten-year period.Under the Trump plan, businesses engaged in manufacturing could elect to expense investment in equipment, structures and inventories, rather than depreciating these items over their deemed useful lives. Businesses that elect this alternative would have limitations on their interest expense deductions.The facts above are the most prominent proposals in the President-elect’s plan. Of course, these items are just Trump’s plans. The House Republicans’ plan varies in some aspects, and although the Senate is controlled by the Republicans, it is not filibuster-proof. However it has already been shown that Trump is willing and ready to work with them to come to agreements, as his original proposed individual tax rates were increased in his final proposal to align with the House’s tax plan. We will not be certain of which proposals will make it through the House and Senate or what compromises are ahead, but all signs would lead to the belief that major tax reform is forthcoming.While accelerating deductions into 2016 (when they will be more valuable) or deferring income to 2017 (when it might be subject to a lower tax rate) may seem to be the right tax strategy, it may not make sense in many instances. While the final outcome of the tax legislation will be uncertain for a bit, we can help you get a year-end tax strategy based on how potential changes may affect your specific situation.