The Potential Impact of the 2016 Election on Tax Reform
The most hotly-contested presidential election in our nation’s history is in the books. On Friday, January 20, 2017, Donald Trump will be sworn in as President of the United States, and Republicans will continue to control both the Senate and the House of Representatives.
While the coming months could very well be as unpredictable as the last year-and-a-half, Republican leaders indicate that tax reform will be a high priority. To that end, we’d like to offer a summary of the tax proposals of President-elect Trump and House Republicans, so you have a better idea of what changes might be forthcoming.
To be clear, this article should not be viewed as an endorsement of any tax plan or an invitation to debate their merits. Our job is to present the facts and help you understand the potential impact.
The Trump Plan
President-elect Trump proposes a reduction in the number of income tax brackets from seven to three. The top rate would fall from 39.6 percent to 33 percent for married-joint filers who make $225,000 or more. The tax rate for income of $75,000-$225,000 would be 25 percent, and the tax rate for less than $75,000 would be 12 percent. For single filers, the tax rate would apply to income that is half of these amounts.
Capital gains tax rates would be maintained – 20 percent for the top bracket, 15 percent for the middle bracket, and 0 percent for the lower bracket. Carried interest, a compensation structure that allows income to be taxed at capital gains rates, would be taxed at ordinary income tax rates. President-elect Trump has proposed repealing the Affordable Care Act, which would eliminate the 3.8 percent tax on investment income.
The standard deduction would increase to $30,000 for joint filers and $15,000 for single filers. Itemized deductions would be capped at $200,000 for joint filers and $100,000 for single filers. The alternative minimum tax, personal exemptions, and head-of-household filing status would be eliminated.
The federal estate tax, sometimes called the death tax, which currently has a maximum rate of 40 percent, would be eliminated. However, capital gains on property held until death, and valued at more than $10 million, would be subject to tax with certain exemptions.
For businesses, the tax rate would drop from 35 percent to 15 percent, and the alternative minimum tax would be eliminated. Other than research and development credit, “most corporate tax expenditures” would be eliminated. Companies that manufacture in the U.S could choose to expense capital investment and thereby lose the ability to deduct corporate interest expense. Once an election is made, it can only be revoked within three years.
The House Republican Plan
The blueprint for tax reform introduced by House Republicans in June, like the Trump plan, calls for the top income tax rate to be reduced to 33 percent and the number of brackets to be reduced to three. It would implement reduced, progressive rates on capital gains, dividends and interest income, and the alternative minimum tax would be eliminated. The Affordable Care Act would be repealed.
Multiple family tax benefits would be consolidated into a larger standard deduction and a larger child and dependent tax credit. All itemized deductions would be eliminated, except for the mortgage interest and charitable contribution deductions. Tax incentives for retirement savings would remain, while estate and generation-skipping transfer taxes would be repealed.
The House GOP plan would create a new business tax rate for sole proprietorships and pass-through entities rather than taxing them at individual rates. The corporate rate would be reduced to 20 percent.
Companies would be able to expense the cost of business investments. Interest expenses could be deducted against interest income, and any net interest expense could be carried forward and allowed as a deduction against future net interest income.
Both the Trump plan and the House Republican plan would significantly reduce tax rates on individuals and businesses. The Trump plan’s corporate tax reduction (15 percent) goes even further than the House Republican plan (20 percent).
Both plans eliminate the alternative minimum tax, the estate tax, and the Affordable Care Act. They would also scale back itemized deductions and business credits and deductions while reigning in business interest deductions. At the same time, there are number of details and proposals addressed in the Trump plan but not the House plan, and vice versa.
If there is one thing we’ve learned in recent years, it’s that change occurs at a snail’s pace. Tax proposals will need to be negotiated between various factions of the Republican House membership and President-elect Trump before going through a complex legislative process.
In other words, don’t expect a new tax code in January. While tax reform proposals are likely, it is impossible to predict what the final proposals will look like and when they will come up for a vote. We’ll keep a close eye on the progress of proposed changes to the tax code, so check back with the LFL Veritas blog for updates.