With President-elect Trump set to take office on January 20, 2017, Americans can expect a sea of change in policy and governance, particularly considering the Republican majorities in both the House and Senate. Included in Trump’s “100-day action plan to Make America Great Again”, are sweeping changes to existing tax policies labeled the “Middle Class Tax Relief and Simplification Act” that will impact individuals and businesses alike.
Individuals would expect to see a reduction in applicable tax brackets for both ordinary income and capital gains as follows:
$0 to $37,500
$0 to $75,000
$37,500 to $112,500
$75,000 to $225,000
Furthermore, carried interest would be taxed as ordinary income, the Alternative Minimum Tax (AMT) would be eliminated, and the 3.8% Net Investment Income Tax would cease with the repeal of the Affordable Care Act. Other major changes affecting individual filers would be a limit on itemized deductions of $200,000 for Married Joint filers and $100,000 for Single filers, elimination of the Head of Household filing status, and a dramatic repeal of the estate tax. The Tax Policy Center’s, “An Analysis of Donald Trump’s Revised Tax Plan,” analyzes that overall, after-tax income would increase by 4.1%, however the highest-income taxpayers would realize an increase of approximately 14%.
Corporations will see their tax rate drop from 35% to 15%, while owners of pass-through entities (sole proprietorships, s-corporations, and partnerships) would be allowed to elect to be taxed at a 15% flat rate. According to the Tax Policy Center’s analysis, this would create a great incentive for current wage earners to prefer treatment as a pass-through entity. Furthermore, businesses would be allowed to elect to expense business investments in equipment, inventory, etc., however would no longer be able to deduct interest expense. They would also no longer be subject to Alternative Minimum Tax.
The Tax Policy Center’s analysis of Donald Trump’s tax plan calculates that, “the revised Trump tax plan would reduce federal revenue by $6.2 trillion over the first decade of implementation…three-fourths of the revenue loss would come from reductions in business taxes.” They further assessed that in the short-run, gross domestic product would increase, but that the federal debt would increase, “by at least $7.0 trillion over ten years.”
All in all, tax payers at all levels of income would be expected to realize some sort of reduction in their tax obligations under President-elect Trump’s plan. Whether any or all of these proposals come to fruition ultimately lies with Congress, who happen to have their own tax plan outlined. Furthermore, Trump’s plan is considered to be quite costly, while Congress’s would incur about half the cost. Regardless, since tax reform is listed as one of Trump’s first 100-days priorities, expect to hear more on the subject in the early part of 2017. As always, RINA will plan on publishing updates on any tax reform and how they might impact you or your business.