Written by: Patrick Doyle, staff accountant
With the 2016 tax season officially behind us, now’s a good time to revisit potential tax law reform in 2017, a topic addressed in our newsletter issue following the election. After taking office in January, President Trump’s administration had been primarily focused on repeal of the Affordable Care Act (“Obamacare”). Both the White House and Republican lawmakers have recently turned their attention back to tax reform following the unsuccessful attempt at repeal. On May 3rd, U.S. National Economic Director Gary Cohn and Treasury Secretary Steven Mnuchin, on behalf of the administration, revealed a one page summary listing the “core principles” of the President’s tax reform plan. In short, not much changed from the initial proposal released at the end of the campaign. Both Director Cohn and Secretary Mnuchin emphasized that the details underlying those principles were still to be negotiated. With that in mind, let’s take a look again at the highlights from the original proposal and a summary of the “core principles” revealed May 3rd.
Click here to read the Becker and Rosen December 2016 Newsletter, volume 30 This is the newsletter which provided some narrative on President Trump’s initial proposal following the campaign, as well as some individual tax planning ideas to consider for 2016-2017.
Here is a summary of the highlights (“core principles”) from the tax reform plan revealed May 3rd of this year by Director Cohn and Secretary Mnuchin on behalf of the Trump Administration:
For business taxpayers
- Tax rate would decrease from 35% to 15% for corporations, and the top rate for pass-through businesses (S-Corporation, LLC, Partnership) would be reduced from 39.6% to 15%
- There would be a one-time repatriation tax on offshore earnings. The exact percentage of the tax rate is still being negotiated. Note that the proposal on the campaign trail had indicated 10%
- There would be a shift from a worldwide system of taxation (under which a U.S. taxpayer is generally taxed on its worldwide income regardless of where earned) to a territorial system (under which income would generally be taxed in the country where it is earned).
- The plan did not include a border adjustment tax, which several House Republicans favor as a way to offset revenue losses resulting from other tax cuts.
For individual taxpayers
- The current seven individual income tax rates would be reduced to three - 10%, 25%, and 35%. Tax brackets (i.e., income levels at which these rates would apply) have not yet been determined.
- The standard deduction would be doubled, with the intended result that fewer taxpayers would itemize deductions.
- The alternative minimum tax (AMT) would be repealed.
- There would be some sort of tax relief for child and dependent care expenses, although no specifics were provided.
- The 3.8% net investment income tax (“Obamacare tax”) would be repealed.
- The estate tax (transfer tax imposed on decedents with gross estates > $5,490,000 in 2017) would be repealed.
- Most “tax breaks” would be repealed. Exceptions would be made for certain provisions involving home ownership, charitable giving, and retirement savings. In response to a question from the press, Secretary Mnuchin said specifically that the mortgage interest deduction would be retained, and that the deduction for state and local income taxes would be eliminated.
The plan overview revealed on May 3rd didn’t include any proposals for raising new revenue to offset that lost by the tax cuts. The House Ways and Means Committee (working on its own proposal but in conjunction with the Trump Administration) will unveil the initial tax bill, which still aims for a revenue-neutral package. As for a timeframe, the administration said they were determined to “get it done this year (2017)”.
So where do we go from here? As mentioned above, it’s still a little too early to tell what will happen with reform, a monumental task to say the least. But most advisors agree that there will be a major overhaul to the tax code occurring sometime in 2017-2018. The last major overhaul occurred more than 30 years ago…so stay tuned. Until then, if you have any questions regarding potential reform, or if you’re concerned with a specific issue applicable to your own tax situation, please contact us.