Mark Luscombe
Principal Federal Tax Analyst Wolters Kluwer Tax & Accounting
How to Take Advantage of the Tax Cuts and Jobs Act
iStock_Bastiaan Slabbers_Donald Trump
Trump's Victory Could Lead to Big Tax Law Changes
President-elect Donald Trump put forward a number of tax proposals during his campaign and also made modifications during the campaign to reduce their deficit impact and to more closely conform to congressional Republican proposals.
Here is a summary of his most recent tax proposals and their likelihood of being implemented. The Republican majorities in both houses of Congress should, in general, make it easier for a Republican administration to enact tax legislation.
Individual Tax Cut Proposals
Trump has proposed reducing the individual marginal-rate tax brackets from six rates to three rates: 12, 25, and 33 percent. This is a decrease from the current top rate of 39.6 percent. These rates conform to Republican congressional proposals and, therefore, are likely to survive.
Trump has also proposed to more than double the standard deduction to $15,000 for single individuals and $30,000 for joint filers. He has proposed the elimination of the deduction for personal exemptions and the head-of-household filing status. For some taxpayers, the loss of personal exemptions could cost more in taxes than the gain from the increased standard deduction. Congress may do some revisions to address these issues.
Business Tax Cut Proposals
Trump has proposed a reduction in the top corporate tax rate to 15 percent and to also extend this 15 percent top rate to income from pass-through entities and sole proprietorships. The current top corporate tax rate is 35 percent, and the current top rate on business income from pass-through entities and sole proprietorships is the top ordinary income tax rate of 39.6 percent.
Trump has proposed that some sort of tax, like the tax on corporate dividends, would be applied to distributions of business income from these other entities. The Trump campaign has stated that it would hope to include provisions to prevent the conversion of ordinary income into business income, but there are no details at this point.
With congressional concerns about deficit projections from the Trump proposals, these rates may have to come up somewhat. Congress may also be concerned about extending the corporate tax rate to other business income due in part to the deficit and the concerns just discussed.
Proposal to Repeal the Affordable Care Act
Trump has proposed to repeal and replace the Affordable Care Act. This could mean the repeal of all taxes associated with the Affordable Care Act, including the following:
3.8 percent tax on net investment income.
Additional 0.9 percent Medicare tax on wages and self-employment income.
Penalty on individuals for failure to obtain health insurance.
Penalty on employers for failure to offer affordable health insurance.
"Cadillac tax" on overly-generous health plans.
Medical device excise tax.
It could also mean repeal of the premium assistance tax credit and the small business health insurance credit. Trump has outlined some basic elements of a replacement plan, but they do not include tax provisions. Congressional Republicans have long proposed repeal of the Affordable Care Act, so this might get through even without a well-thought-out replacement.
Proposal to Repeal the Estate and Gift Tax
Trump has also proposed the repeal of the federal estate and gift tax. He proposed that, as part of the repeal, stepped-up basis on death would be disallowed for taxable gains in excess of $10 million. Again here, congressional Republicans have long pushed to repeal the estate tax, so this is also likely to pass in any tax legislation.
Proposals on Child Care
Trump has outlined a set of proposals to provide tax assistance for child care:
A new above-the-line deduction for child- and dependent-care expenses.
An increase in the Earned Income Tax Credit for working parents through a spending rebate.
The creation of Dependent Care Savings Accounts with individual contributions matched 50 percent by government contributions.
An increase in the annual cap for the business tax credit for on-site child care, with a reduced recapture period.
While this has not been a Republican priority in Congress, it is probably something Congress could support and include in 2017 tax legislation.
Other Trump Tax Proposals
Trump has proposed to impose a cap on the amount of itemized deductions that could be claimed on a tax return at $100,000 for single filers and $200,000 for joint filers. Congress has been looking at various ways to limit deductions in exchange for rate reductions, but might prefer eliminating some of them rather than just imposing a cap.
Trump has also proposed eliminating both the individual and corporate alternative minimum tax (AMT). AMT repeal is likely to also receive congressional support, as long as the deficit issue can be addressed in some way.
He has proposed taxing carried interests of private equity fund managers at capital gain rates rather than ordinary income rates. The Trump campaign has said that it would expect to clarify how this would work with the new 15 percent tax on business income, but again no specific details. Taxing carried interests has been mostly pushed by Democrats in Congress, but Republicans might be willing to sign on if it is part of a larger tax reform proposal.
In order to pay for lower business tax rates, Trump has proposed to eliminate certain unspecified "corporate tax expenditures," although indicating that the research and development credit would be spared. Congressional Republicans have run into trouble with lobbyists whenever they get too specific about what tax breaks they would eliminate in return for lower corporate rates. This will continue to be a difficult hurdle.
Trump has proposed a doubling of the Code Section 179 small business expensing election to $1 million. He has also proposed the immediate deduction of all new investments in a business. Immediate deduction of investments is a popular idea in Congress to simplify the tax code.
Trump has also proposed to eliminate the business interest deduction. Congressional Republicans may be willing to look at this as a way to address abuses in the debt/equity area, but there is likely to be considerable business opposition.
Trump and Republican members of Congress have not always been in the same camp during the election campaign, but with Republicans still in control of both the House and the Senate in the new Congress and a new Republican administration in 2017, the opportunity appears to exist to break the logjams and enact significant tax legislation.
Congressional Republicans will remain concerned about the significant deficit projections for the Trump tax plans. Their own tax reform plans have been working toward revenue neutrality, and they may propose modifications to the Trump proposals toward achieving the same goal.
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Mark Luscombe, JD, LLM, CPA, is principal federal tax analyst for Wolters Kluwer Tax & Accounting.
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By wflora
Nov 21st 2016 13:21 EST
I think there is an error in the discussion of carried interests. Doesn't Trump want to tax them as ordinary income, not capital gain?