Outlining the Trump Tax Plan

As a candidate in 2016, Donald Trump promised significant tax reform. A few months after becoming President, Trump released a one-page outline of his goals in that area. As the year goes on, we will see many discussions and changes to the plan. This is a review of the original outline, showing the major areas that will be addressed. 

Taxes on Businesses

President Trump wants to cap the corporate income tax rate at 15%. Currently, the top rate is 35%. Such a reduction, he asserts, would make American companies more competitive worldwide.

The outline also includes a one-time tax on “trillions of dollars” held overseas. Previously, President Trump indicated that he favors a 10% tax on corporate offshore profits brought into the United States.

In addition, the plan would eliminate tax breaks for unspecified special interests and implement a “territorial tax system”, to level the playing field for American companies. Generally, in a territorial tax system, domestic profits are taxed at the full rate, whereas profits from abroad are not subject to domestic income tax.

Taxes on Individuals

 The Trump plan calls for reducing the number of tax brackets from seven to three. Today, individual taxpayers start with a 10% income tax rate and move into the 15%, 25%, 28%, 33%, 35%, and 39.6% brackets, as their taxable income increases. The three new tax rates would be 10%, 25%, and 35%.

Depending on the cut-off points for these tax rates, it’s possible that taxpayers now in the 15% bracket would have a 10% marginal tax rate under this plan. Those in the 28%, 33%, and perhaps the 35% bracket could be in the 25% bracket, whereas the top rate would fall from 39.6% to 35%.

 

 

 

Standard Deductions

The tax plan also calls for doubling the standard deduction, which is available to individual taxpayers. That standard deduction is now $6,350 for single taxpayers, $9,350 for heads of households, and $12,700 for couples filing joint returns. Doubling those numbers would produce standard deductions of $12,700 for single filers, $18,700 for household heads, and $25,400 for married couples filing jointly.

If these changes are made, more taxpayers would take the larger standard deduction rather than itemizing deductions. Many popular itemized deductions, such as medical expenses as well as state and local taxes paid, would be eliminated, further encouraging people to take the standard deduction. The deductions for home mortgage interest and charitable contributions would be spared, so it might make sense for taxpayers with these expenses to continue itemizing their deductions if the amounts exceed the standard deductions.

In addition, the outline calls for tax relief for families with child and dependent care expenses without giving details. Press reports hint that one approach could be an increase in the child and dependent care tax credit, which now allows people with care-related outlays to reduce their tax bill by up to $2,100.

High Income Breaks

The next item on the list—repeal the alternative minimum tax (AMT)—would possibly make the interaction between the standard deduction and itemized deductions more thought-provoking. As mentioned, state and local income and property tax no longer would be deductible. However, some people who now pay large amounts of those taxes owe the AMT and don’t get the benefit of deducting such taxes. Would the repeal of the AMT make up for the loss of deducting state and local tax payments? It is worth keeping an eye on this one.

President Trump’s outline also calls for repeal of the 3.8% surtax on net investment income, a tax that applies to taxpayers with high incomes. Currently, high-income taxpayers can be subjected to a 43.4% marginal tax rate on some income if they are in the 39.6% bracket and have ordinary investment income subject to the 3.8% tax. Long-term capital gains can be taxed at a rate as high as 23.8%, with the surtax included.

Also on the “to repeal” list is the federal estate tax. This tax now has an exemption of $5.49 million, which can be $10.98 million for married couples, so relatively few estates owe this tax anyway. Still, if the estate tax is repealed, owners of valuable small companies and investment property might get some relief when those assets pass to younger generations.

From Outline to Legislation

President Trump’s outline obviously needs to be fleshed out before it’s presented to Congress for approval or rejection. Many observers predict that the process will take many months, possibly stretching into 2018.  It is unlikely that changes will be made before the 2017 tax season.

Read on for other takes on the timing of tax reform > >

> GOP Debates Tax Cuts vs. Tax Reform by Alexander Bolton at TheHill.com

> How To Know When the GOP is Serious About Tax Reform by Ben Casselman at FiveThirtyEight.com.

> What Will Be in Tax Reform? by Lee Sheppard at Forbes.com

 

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