As I sit in my home office writing this article I hear the sound coming from my living room TV echoing a news channel report of tomorrow’s big event in Washington D.C. Yes, it is the night before the inauguration of the 45th president of the United States, Donald J. Trump. Whether or not you approve of Trump as the next president of the United States, if you’re a business owner and/or a high-income earner who would like to pay less to Uncle Sam, you’ll likely approve of what his tax plan will do for you.
Trump and the House GOP have both indicated that tax reform will be high on the White House agenda and the House’s agenda in 2017. This article is a very brief summary of possible business and individual tax reforms as proposed in the following tax proposals: The House Republican Tax Reform Task Force Blueprint (the Blueprint) and the Trump Tax Plan (the Trump Plan). House Ways and Means Chair Kevin Brady, R-Texas, has characterized 2017 as the “best opportunity in 30 years,” for tax reform. Brady has added that the Blueprint is “about 80 percent similar” to the Trump Plan. Nevertheless, further details on both proposals remain to be mapped out as actual legislative language begins to be drafted.
Lower Tax Rates And Fewer Tax Brackets
Both the Blueprint and the Trump Plan propose to shrink the number of tax brackets from seven to three, with 12%, 25% and 33% rates. The top income tax rate of 33% would apply to married couples earning $225,000 or more and single people making at least $112,500. Currently, the top rate is 39.6%, which kicks in once income exceeds about $470,000 for married couples and $418,000 for single people. In addition, effective January 2013, high-income taxpayers began paying the net-investment-income tax (NIIT), an additional 3.8% Medicare surtax on items of income like interest, rents, royalties and passive business income. The Trump Plan eliminates this tax. The majority of the clients I work with have been subject to the NIIT, so the elimination of this tax would certainly be a welcome change to a lot of taxpayers. The end of the NIIT would also make the top rate on capital gains and dividends a true 20%. Currently, qualified dividends and long-term capital gains (the sale of certain assets held longer than one year) are taxed at 15% for most taxpayers, while those in the 39.6% bracket pay 20% plus the 3.8% NIIT.
According to the Tax Policy Center of the Urban Institute and the Brookings Institution, the Trump Plan would reduce the average tax bill in 2017 by $2,940, increasing after-tax income by 4.1%.
A Good Time To Die
Under current law, if you die with an estate valued at more than $5.45 million, you pay a tax of 40% on the amount over $5.45 million (so if the estate is valued at $10 million, you pay a 40% tax on $4.55 million). The Trump Plan proposes to eliminate this tax.
Under the Trump Plan, estates wouldn’t go completely untaxed. The Trump Plan would tax the appreciation of estate assets valued at $10 million or more, but only when the beneficiary sells the assets, not immediately upon death.
Big Tax Cuts For Business
The Trump Plan and the Blueprint propose to significantly reduce the tax burden for businesses. U.S. corporations currently pay tax at a top marginal rate of 35%, the third-highest statutory rate in the world. The Trump Plan proposes to drop the corporate tax rate to 15% and the Blueprint proposes to drop the corporate tax rate to 20%. Both plans propose to eliminate certain business deductions (for example, interest on corporate debt), however, generally businesses would be permitted to deduct the cost of asset acquisitions immediately, a big change from current law, which requires businesses to depreciate the cost of purchased assets over a number of years.
Under the Blueprint, owners of pass-through entities (sole proprietorships, partnerships and S corporations) will be taxed on the pass-through business income, after a reasonable deduction for compensation, at 25%. Under the Trump Plan owners of pass-through entities would be able to choose to be taxed at a rate of 15% on their pass-through income rather than the individual income tax rate, which under the Trump Plan tops out at 33%. For taxpayers who own businesses, the ultimate rate enacted by Congress will have a major effect on after-tax income.
The Great Unknowns
What remains unclear is when, if enacted, the new tax law will kick in. Historically, presidential tax plans have taken effect on one of the following dates: January 1 of the year it’s passed (in this case 2017); the date of passage; or January 1 of the following year (2018). The legislative process to enact such changes is also very uncertain. The Republicans may have to utilize a budget “reconciliation” process in order to enact their desired legislation. The reconciliation process could require any enacted tax changes to expire in the future (similar to the Bush-Era Tax Cuts). Of course, the Republicans would love to avoid the reconciliation process, however they will need eight senate Democrat votes to do so.
In any case, 2017 should be set up for lot of significant and dramatic change in the world of tax law. Give us a call if you have questions or concerns. We stay abreast of changes and can help evaluate your current situation to plan ahead.
Chris West, CPA is the principal in charge of the Grand Junction tax office. He is a Colorado Mesa University graduate and began his career in public accounting in 1996. Chris specializes in mergers and acquisitions, real estate tax issues, real estate development, cost segregation studies, small business taxation, and consulting, tax, and estate planning for high net-worth individuals.
