We have a new President and our guess is that we will be in a new tax environment. Trump’s tax plan calls for reducing the current 7 tax brackets (10% to about 44%) to 3 brackets: 12%, 25%, & 33%. The estimate is that dividends and capital gains rates would top out at 20%. You can click here to see the whole plan in its entirety.
Under the Trump plan, itemized deductions would be capped at $200,000 and a taxpayer would still get the greater of actual itemized deductions or the standard deduction. Trump would increase the standard deduction from $12,600 to $30,000 and would eliminate personal exemptions. If you have fewer than 5 exemptions, you will do better with the standard deduction under the Trump plan and if you have more than this, you would do better under the current system. If you claim actual itemized deductions and claim personal exemptions, then you would lose the benefit of the personal exemptions worth a deduction of about $4,000 for you, your spouse, and dependent children except that for many taxpayers the deduction is phased out many taxpayers. If you are currently not getting the personal exemption, then you lose nothing.
In the Trump plan families get much more generous treatment of child care costs by allowing the family to deduct the average cost of child care from their taxes.
Trump has also proposed cancelling the estate tax and taxing any appreciation of assets on a subsequent sale if the estate value exceeds $10 million. The tax on the appreciation would not occur at death, but when the asset is sold. This is a big shift also as we would go from a tax on transfer (Estate tax) to a regular capital gain on sale. If the estate is below $10 million, then your heirs would presumably still get a date of death step-up in value.
At present assets passing through an estate are stepped-up to date of death value such that an immediate sale would yield no taxable gain or loss. Under the Trump proposal if the estate is valued above $10 million, there would be no estate step up in value and a subsequent sale of those assets would be taxed at capital gains rate (max 20%) versus the current 40% beginning estate tax rate. If this passes, the next 4 years would be an opportune time to die and some Democrats appear to be considering this at present.
The biggest change would be in the business tax arena. Trump proposes to drop the current 35% corporate tax rate to 15% but eliminating many business deductions (not sure which). Asset purchases would be immediately expensed and there would be no depreciation to calculate.
The bolder change is that pass-through entities such as partnership and S corporations would also pay the 15% entity rate but no individual taxes. This means that the owner of an S Corporation would be taxed at 15% while a highly compensated employee of the S Corporation could pay tax at 33%. We’ll probably need some more detail here as well. It might be that partnerships would need to adopt a reasonable compensation for active employment similar to S Corporations. Under this scenario, reasonable compensation would be taxed at ordinary rates and excess business profits would be taxed at the lower rates.
The plan seems to be somewhat close to the Paul Ryan Plan, which you can find on-line. The Trump plan does not have as much detail as the Ryan plan but we are sure we will see more detail soon. Our guess is that we will begin to see some tax proposals in 2017, maybe taking effect in 2018.
Traditionally, Congress scores each tax law proposal to see what the revenue impact to the government will be over the next 10 years. Both Trump & Ryan indicate that economic growth may offset the loss of revenue. Many of the scores indicate that both the Trump & Ryan plans will add to the deficit. Hopefully, this will be addressed as well without the typical budget games that politicians use. While I feel certain that many of these proposals will change before passage, my guess will be that it will be a variation of Trump & Ryan concepts. I hope that they will reduce some spending at the same time to avoid adding to the deficit.