Donald Trump’s election, and the continuing control of Congress by the GOP, are expected to bring about tax law changes for individuals and businesses. Throughout his campaign, President-elect Trump promised to take up tax reform, including reduced income tax rates, expanded tax breaks for families, and the repeal of the Affordable Care Act. While it is too early to predict what the final version of tax reform will look like, if and when it passes, or whether it will be retroactive to January 1, 2017, Trump’s tax plan as laid out during his campaign is an indicator of the shape that future tax reform may take.
Income Tax: Trump has proposed compressing the current seven individual tax brackets (i.e., 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%) into three brackets of 12%, 25%, and 33%. The top bracket would decline from 39.6% to 33%.
Under current law, the standard deductions for 2017 for single filers, and married couples filing jointly, are $6,350 and $12,700 respectively. Under Trump’s proposal, the standard deductions would increase to $15,000 and $30,000 respectively. All personal exemptions would be eliminated, as would the “head of household” filing status.
Under Trump’s tax plan, total itemized deductions would be capped at $100,000 for single filers, and $200,000 for married couples filing jointly.
Estate and Gift Tax: President-elect Trump has proposed the complete elimination of the federal estate and gift tax regimes.
Alternative Minimum Tax: Under Trump’s tax plan, the Alternative Minimum Tax (AMT) would be completely eliminated.
Net Investment Income (NII) Tax: As part of the repeal of the Affordable Care Act, the 3.8% Net Investment Income tax also would be repealed.
Carried Interest: Carried interest would be taxed as ordinary income. Under current law, carried interest often receives preferential long-term capital gain treatment.
Expanded Childcare Tax Benefits: Trump would expand the Earned Income Tax Credit (EITC) for working parents. There would be “spending rebates” to qualifying families through the expanded EITC. The rebate would be equal to a percentage of eligible childcare expenses, subject to a cap of half of the payroll taxes paid by the taxpayer. Qualifying taxpayers would also be entitled to above-the-line deductions for child and elder care expenses.
Trump has proposed the creation of tax-favored Dependent CARE Savings accounts (DCSAs), which would be matched by a government contribution. Total annual contributions to a DCSA would be limited to $2,000 per year from all sources, including the account owner (a parent in the case of a minor, or the person establishing the elder care account), immediate family members of the account owner, and the employer of the account owner.
Corporate Income Tax: The top corporate income tax rate would be reduced from the current 35% to 15%, and the corporate Alternative Minimum Tax would be repealed. Unspecified “corporate tax expenditures” would be eliminated, except for the Research and Development (R&D) tax credit.
Taxation of Business Flow-Through / Pass-Through Entities: Income derived by sole proprietorships, partnerships, and S corporations would be taxed at a 15% rate as long as the income was retained within the business. Upon distribution of the income, a second tax would be imposed on the recipient, similar to the current treatment of dividends from a C corporation.
Section 179 Deduction: Trump would increase the annual cap on Section 179 expensing from $500,000 (under current law) to $1 million.
Childcare Credit for Businesses: The credit for on-site childcare would be expanded.
Manufacturing Expensing: Rather than deducting interest expense, Trump has proposed that manufacturing firms would be able to immediately deduct all new investments in the business.
THE AFFORDABLE CARE ACT
Trump has proposed the repeal of the Affordable Care Act.
Repatriation: In order to encourage the repatriation of offshore profits to the United States, Trump has proposed that such repatriated corporate profits would be taxed at a one-time reduced income tax rate of 10%.
While there is little in the way of concrete action to recommend at this time, you might consider the following:
- Defer income when possible from 2016 to 2017 or beyond, as tax rates are more likely to decrease than increase.
- Maximize depreciation deductions, utilizing cost segregation studies where necessary.
- Utilize Section 1031 exchanges to defer potential gains.
- If selling now for a note with no Section 1031 exchange, elect the installment method to defer a portion of the gain into future years.
We will continue to monitor tax reform activity in Congress, as well as statements from the new Administration, and will keep you apprised of changes. Please contact your FGMK tax professional to discuss tax reform, or any other tax matters that may impact your business.
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