The release yesterday of President Trump’s tax overhaul concepts has been touted as being a plan or even a proposal both of which are at best gratuitous descriptions. In reality what was released was a list of principles or talking points condensed into a single page of bullet points. The concepts presented are the basic starting principles that the administration wants to base future tax discussions on with the hope of getting sufficient consensus and compromise that detailed proposals can actually be drafted and approved. While there are potential winners and losers in any negotiation one can be guaranteed that any final legislation will be different than what has been broadly presented with the actual winners potentially changing. It is important to be aware of the current discussion and direction but it is too early to take specific actions steps.
Below are some of the basic points and some thoughts on what the ramifications could be.
- The stated foundation principal of the tax reform was to make America competitive again. Thus the biggest winner was initially corporations due to a reduction in the corporate income tax rate from 35% to 15% in order to make our multi-national companies competitive on the world stage. However, only 8% of US businesses are subject to the corporate income tax as the majority of US businesses are pass-through entities such as partnerships, LLCs, S-Corporations or sole proprietorships. Therefore what has actually been presented is an expansion of the corporate 15% tax rate benefit to all businesses entities. This is the biggest winner but due to numerous issues will be contested and most likely restricted in how it would apply.
- The plan includes a reduction in the top individual tax rate from 39.6% to 35% as well as elimination of the 3.8% tax on investment income that funded Obamacare. The administration has condensed the individual tax brackets from seven to three brackets; 35%, 25% and 10%.
- Elimination of both the estate tax as well as the alternative minimum tax impacting mainly the wealthy.
- Elimination of most itemized deductions such as state and local income taxes but retaining the home mortgage deduction and charitable deduction. In addition the standard individual deduction would be doubled to $12,700 for individuals or $25,400 for joint filers.
- A one-time repatriation tax that would allow companies to bring back money from overseas with a lower one-time tax.
These principles or guideposts are just the opening shot at tax reform and the final outcome will significantly impact each of us differently and impact structurally how business is conducted in the future. If you have any questions navigating these principles contact us.