How Tax Reform Under President Trump Could Affect You
At the end of July, the Trump Administration announced the key principles and goals for tax reform, based on an outline Trump made public in April that touted his tax reform plan as “the biggest individual and business tax cut in American history.” If passed, it would be the first significant tax reform legislation since 1986, when President Reagan implemented two major tax cuts.
Among the tax changes proposed for families are:
- Reducing the current seven tax brackets to three, which would be taxed at rates of 10%, 25% and 35% (income ranges have not been specified).
- Doubling the standard deduction (there is no specification for head of household filing status)
- Providing tax relief for families with child and dependent care expenses
Among the tax changes proposed to simplify the tax code are:
- Eliminating targeted tax breaks that mainly benefit the wealthiest taxpayers
- Protecting the home ownership and charitable gift tax deductions
- Repealing the Alternative Minimum Tax
- Repealing the Estate Tax
Among the tax changes proposed for businesses are:
- Implementing a 15% business tax rate
- Implementing a “territorial” tax system
- Levying a one-time tax on monies held overseas
- Eliminating tax breaks for special interests
Breaking Down President Trump’s Tax Reform Proposal
While Trump’s plan has only been released as a largely broad outline, these and other changes could have significant effects on annual tax returns, retirement plans and other investments. It is wise for investors to begin considering the impact of the reforms if they are passed.
The Estate Tax: One significant change the plan proposes is elimination of the estate tax, which currently only applies to the top 1% of the population. As it stands now, a married couple is exempt from taxes on the first $10.9 million of their estate, and would be taxed at a rate of 40% for any amount above that.
Under Trump’s plan, there would be no step-up in basis at death, meaning that capital gains tax on sales of inherited property would still impact wealth transfer tax planning.
The Standard Deduction: Under Trump’s proposal, the standard deduction would double to $24,000 for couples. This would shift many taxpayers from taking itemized deductions to taking the standard deduction. While this move seems favorable for taxpayers, charities fear the lack of tax incentive could reduce charitable gifts.
The Changing Tax Brackets: If you were to move into a lower tax bracket under the proposed new structure, it would be important to assess the impact on your retirement plan. However, as no income ranges have yet been specified, the best plan is to monitor how tax reform efforts unfold and make investment decisions accordingly.
The Alternative Minimum Tax: Eliminating the Alternative Minimum Tax, a tax that has traditionally been viewed unfavorably, would likely benefit high-income earners most as it would eliminate the non-graduated alternative minimum income taxes and allow for deductions that have otherwise been disallowed under the AMT.
The Cap on Itemized Deductions: Trump’s tax reform plan proposes a $200,000 cap on itemized deductions for couples, and would bar single filers from deducting more than $100,000. These proposed changes would most impact high-income earners–couples and singles who make $1 million or more.
Conversely, most itemized deductions would be nixed under Trump’s plan, and the ones that are not on the chopping block may lose their appeal in the face of other changes to the tax code, such as the doubling standard deduction. The tax breaks expected to remain include the mortgage interest deduction and charitable donation deduction.
Changes for Businesses Under Trump’s Proposed Tax Reform Plan
Taxes remain a top concern of business owners, who feel the pinch not just on the profit side, but on the growth side. However, business owners are reporting they feel largely optimistic that Trump’s tax reform proposals will provide more breathing room.
Tax Rate Cut. The plan proposes cutting the small business and corporate tax rate by more than half, from 38% to 15%.
That 15% rate would also apply to partnerships, real estate companies, hedge funds and private equity funds, which are all currently taxed at the income tax rate of 39.6%.
One-Time Repatriation Tax. Corporations holding money overseas will be allowed to bring it back into the U.S. for a one-time repatriation tax that has yet to be specified. This aspect of the plan is followed by a proposal for a “territorial” tax system, which also has yet to be laid out in any detail, but would exclude income earned by businesses overseas.
Closing Loopholes. For corporations or wealthy individuals, Trump’s proposed tax reform plan closes loopholes that include avoiding taxes by setting up offshore businesses.
For business owners concerned with succession, Trump’s proposal to eliminate the estate tax and lower capital gains rates for the highest two tax brackets in his plan could make a significant difference in sales decisions.
The Administration’s July statement calls for Congress to begin moving this tax reform legislation through the House and Senate in the fall. President Trump has made it clear he aims to get something passed this year. While it’s difficult at this juncture to make predictions about the implications to your personal or business finances, we suggest you meet with a financial advisor who can take a knowledgeable view of your portfolio and business to make recommendations based on what these proposed changes would mean for you.