On the first Monday of his presidency, President Trump met with business leaders at the White House and spoke of “cutting taxes massively, for both the middle class and for companies.”1 This was a common talking point during his campaign; additionally, his tax plan and the House Republicans’ tax-reform plan (also called the “Blueprint”) share enough similarities that tax cuts — or perhaps even comprehensive tax reform — likely will be enacted this year or soon after. So, as a taxpayer, what should you expect moving forward?
A breakdown of both plans for individuals
President Trump’s plan and the GOP’s Blueprint call for lower tax rates and simplification of the tax code, including fewer tax brackets for individuals and elimination of the alternative minimum tax (AMT). There are currently seven tax brackets for individuals, ranging from 10 percent to 39.6 percent; both plans include only three brackets at 12 percent, 25 percent and 33 percent (see the chart below).
President Trump has also been extremely vocal about repealing the Affordable Care Act (Obamacare), which would eliminate the 3.8-percent Medicare surtax on investment income for most individuals in the top three tax brackets, as well as the 0.9-percent surtax on wages over $250,000 ($200,000 for single filers). While President Trump’s plan maintains the same preferential rates for long-term capital gains (at 0 percent, 15 percent and 20 percent), the GOP’s plan calls for a 50-percent reduction in the proposed tax rates (also listed below) for all investment income.
Do the plans differ in any way?
Here’s a quick breakdown of notable differences in both tax plans.
Itemized Deduction Rules
Both President Trump’s plan and the Blueprint would increase the standard deduction and eliminate personal exemptions, thereby reducing the number of taxpayers who utilize itemized deductions. But the plans do differ on the itemized deduction rules; President Trump’s tax plan would cap them at $200,000, while the GOP would eliminate all itemized deductions, except for the mortgage interest and charitable contribution deductions.
The charitable gifting rules were intentionally crafted to provide enhanced tax benefits to encourage the support and improvement of social welfare. So while the new rules may limit those deductions, it is unlikely they will be limited to an extent that would be considered detrimental to society.
Dependent Credits and Deductions
Moreover, President Trump’s plan and the Blueprint include slight differences in which dependent credits or deductions will be allowed for individuals. Both retain some form of deduction or credit for children, childcare and/or higher education costs or investment, as well as the earned income credit (EIC).
What about businesses?
The corporate tax rate is currently 35 percent, one of the highest in the world. The President’s plan and the GOP Blueprint propose to reduce the business tax rate to 15 percent or 20 percent, respectively, to make U.S. businesses more competitive in the global market and to stimulate growth. Both plans would also eliminate the corporate AMT and most business tax credits, except for the research and development credit. Under either plan, businesses could immediately expense the cost of investments; with the GOP Blueprint, they could also expense the cost of buildings.
President Trump’s plan is ambiguous about how pass-through entities’ and sole proprietorships’ income would be taxed, since this type of income is currently taxed at the individual tax-return level. However, his tax plan does mention lowering rates to 15 percent for both large and small businesses. Since most small businesses are pass-through entities — such as partnerships and S corporations, or sole proprietorships, which an owner reports directly on an individual tax return — new legislation could reflect the GOP’s proposal regarding how those companies are taxed. The GOP Blueprint would limit the tax rate on sole-proprietorship and pass-through income to 50 percent of the owner’s individual rate, with an allowable deduction for reasonable compensation. The compensation component then would be taxed at the individual ordinary income rates.
Estate and gift tax could be repealed
Finally, both President Trump and the GOP propose to eliminate the estate, gift and generation-skipping transfer taxes. This move would also eliminate the step-up in basis at death that heirs receive on inherited assets. President Trump also proposes a capital-gains tax on assets received due to death, specifically for assets over $10 million ($5 million for single filers).
Hopefully, you have a better understanding of what’s on the tax front for this year, and how these changes might affect your individual and/or business tax situation. However, keep in mind that these reforms may impact people in different ways. It is also important to be aware that no new legislation has been introduced or enacted at this point; these are only plans and not yet law. It is likely that some variation of these proposals will be enacted during this presidency, but they could be changed slightly or significantly.
Be proactive and reach out to your accountant to get a more detailed analysis of what these changes could mean for you and your tax situation, and to keep abreast of new legislation that is proposed or enacted throughout the year. After all, early tax planning is smart tax planning.