The unexpected victory of Donald Trump in the 2016 Presidential election has experts scrambling to review his proposed changes to the federal tax laws. While nobody can predict with complete accuracy what adjustments Trump will attempt to make as President, or what Congress will agree to consider, a look at some of the ideas he proposed as a candidate will give us some idea of what we can expect.
Perhaps the most visible and contentious campaign promises made by President-elect Trump is the repeal of the Affordable Care Act (ACA), more commonly referred to as “Obamacare.” Aside from the impact on the people who rely on the new health insurance exchanges for coverage, repeal of the ACA would eliminate a huge burden of monitoring and reporting by businesses that came along with the Act. In addition, repeal of the ACA would also mean the repeal of the 3.8 percent net investment income (NII) tax that was one of the Act’s added provisions. The medical device tax that is part of the ACA would also likely be eliminated.
A “Better Way”?
Several of Trump’s tax proposals bear close resemblance to the “Better Way” tax reform blueprint released by the House GOP in June, 2016, including:
- The Middle Class Tax Relief and Simplification Act, which would provide middle class families with tax cuts of up to 35 percent, and reduce the corporate tax rate from 35 percent to 15 percent.
- Affordable Childcare and Eldercare Act, which would allow taxpayers to deduct the cost of childcare and care for elders from their tax returns.
- American Energy & Infrastructure Act, which would use public/private partnerships to generate an estimated $1 trillion in infrastructure investment over 10 years. The hope is that this investment will spur job growth as well as lead to much needed repairs of highways, bridges and railways.
Candidate Trump campaigned on the idea of simplifying taxes by creating just three tax brackets (down from the current seven), at 12 percent, 25 percent, and 33 percent (down from a top rate of 39.6 percent). No details have been made available on the income levels to which each bracket will apply.
Trump also wants to more than double the standard deduction (to $15,000 for individuals and $30,000 for couples filing jointly). But he would also cap the total amount of deductions that could be claimed at $100,000 for single filers and $200,000 for married couples filing jointly. It is expected that these changes could simplify the tax return process by reducing the number of taxpayers who itemize deductions.
No changes are expected to be made to capital gains rates. But President-elect Trump has proposed eliminating the federal Estate and Gift Tax, and doing away with the Alternative Minimum Tax (AMT) for both individuals and businesses. He would allow carried interest to be taxed as ordinary income.
Business Tax Changes on the Horizon?
Business taxes are also on Trump’s radar, in a big way. He has proposed lowering the corporate tax rate to 15 percent across the board. For comparison, the current top corporate rate is 35 percent. He would also allow “pass through” income in partnerships, sole proprietorships and S corporations to be taxed at 15 percent, rather than being taxed at the individual shareholder’s rate. However, once the profits are distributed a second tax would be imposed on the individual’s income.
In exchange for the lower corporate tax rate Trump would eliminate most corporate tax credits, with some exceptions (such as the R&D credit and childcare credit). He would double the Section 179 expensing cap to $1 million per year, and allow manufacturing companies to immediately deduct all new investments in the business.
Finally, President-elect Trump has stated his intention to make U.S. companies more competitive globally. Part of that effort is his proposed repatriation of corporate profits held offshore at a one-time reduced tax rate.
With all of this on the horizon, it is important to remember that the business of the federal government continues every day, including many late-2016 tax changes. One of the more important areas on which to focus is the status of the year-end tax extenders which may or may not be passed by the “lame duck” Congress. Both individuals and businesses could be affected in areas such as energy efficiency credits, the higher education tuition and fees deduction, and incentives for biodiesel and alternative fuels.
Be Watchful
While several of these changes may be implemented during the first 100 days of Trump’s term, it may take a year or longer to bring them all to fruition. We’ll be closely monitoring proposed tax changes and how they may affect you and your business. In the meantime, please contact Gray, Gray & Gray’s Tax Department at (781) 407-0300 with any questions.