Trump and taxes: Big changes could be in store in 2017
Whether or not you approve of President Donald Trump, there’s a good chance you’ll approve of what his proposed policies could do if you’re a high income earner or business owner who’d like to pay less in taxes.
Trump and Republicans in the House of Representatives have indicated tax reform will be high on the agenda for 2017. This column offers a brief summary of potential individual and business tax reforms in the House Republican tax reform task force blueprint and Trump tax plan.
Kevin Brady, a Republican from Texas who serves as chairman of the House Ways and Means Committee, has characterized 2017 as the best opportunity for tax reform in 30 years. Brady said the blueprint is about 80 percent similar to the Trump plan. Further details on both proposals remain to be mapped out as actual legislative language is drafted.
n Lower tax rates and fewer tax brackets: Both the blueprint and Trump plan propose to shrink the number of tax brackets from seven to three, with 12 percent, 25 percent and 33 percent rates. The top income tax rate of 33 percent would apply to married couples earning $225,000 or more and single people making at least $112,500 a year. Currently, the top rate is 39.6 percent, which kicks in once income exceeds about $470,000 for married couples and $418,000 for single people. Starting in 2013, high-income taxpayers also began paying the net investment income tax, an additional 3.8 percent Medicare surtax on interest, rents, royalties and passive business income. The Trump Plan eliminates this tax. The majority of the clients with which I work have been subject to the NIIT, so eliminating this tax would constitute a welcome change for a lot of taxpayers. The end of the NIIT also would make the top rate on capital gains and dividends a true 20 percent. Qualified dividends and long-term capital gains on the sale of certain assets held longer than a year are currently taxed at 15 percent for most taxpayers, while those in the 39.6 percent bracket pay 20 percent plus the 3.8 percent NIIT.
According to the Tax Policy Center of the Urban Institute and Brookings Institution, the Trump plan would reduce the average tax bill in 2017 by $2,940, increasing after-tax income by 4.1 percent.
A good time to die: Under current law, if you die with an estate valued at more than $5.45 million, you pay a tax of 40 percent on the amount over $5.45 million. So if the estate is valued at $10 million, you pay a 40 percent tax on $4.55 million. The Trump plan proposes to eliminate this tax. Under the Trump plan, estates wouldn’t go completely untaxed. The Trump plan would tax the appreciation of estate assets valued at $10 million or more, but only when the beneficiary sells the assets, not immediately upon death.
Big tax cuts for business: The blueprint and Trump plan propose to significantly reduce the tax burden for businesses. U.S. corporations currently pay tax at a top marginal rate of 35 percent, the third-highest statutory rate in the world. The Blueprint proposes to drop the corporate tax rate to 20 percent. The Trump plan proposes to drop the corporate tax rate to 15 percent. Both plans propose to eliminate certain business deductions — interest on corporate debt, for example. However, businesses would be permitted to deduct the cost of asset acquisitions immediately. That’s a big change from current law, which requires businesses to depreciate the cost of purchased assets over a number of years.
Under the blueprint, owners of such pass-through entities as sole proprietorships, partnerships and S corporations would be taxed on the pass-through business income after a reasonable deduction for compensation at 25 percent. Under the Trump plan, owners of pass-through entities would be able to choose to be taxed at a rate of 15 percent on their pass-through income rather than the individual income tax rate, which under the Trump plan tops out at 33 percent. For taxpayers who own businesses, the ultimate rate enacted by Congress will have a major effect on after-tax income.
The great unknowns: What remains unclear is when, if enacted, a new tax law would kick in. Historically, presidential tax plans have taken effect on one of the following dates: Jan. 1 of the year it’s enacted, in this case 2017; the date of passage; or Jan. 1 of the following year, which would be 2018. The legislative process to enact such changes remains uncertain as well. Republicans could have to use a budget reconciliation process to enact legislation. The reconciliation process could require any enacted tax changes to expire in the future — similar to Bush-era tax cuts. The Republicans would love to avoid the reconciliation process, but need eight Senate Democrat votes to do so.
In any case, 2017 could see a lot of significant and dramatic change in the world of tax laws.