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January 25, 2017

So, What's Included in Donald Trump's Tax Proposals?


The tax changes described on President Donald Trump’s website are a crucial part of his overall plan to boost growth in the U.S. economy to an average rate of 3.5% per year and to create 25 million new jobs. The website states that the goals of Trump’s Tax Plan include the following:
  • Across-the-board tax reductions, especially for working and middle-income Americans.
  • Ensure that the rich will pay their fair share, but no one will pay so much that it destroys jobs or undermines the U.S.’ ability to compete.
  • Eliminate special interest loopholes, make the business tax rate more competitive to keep jobs in the U.S. and create new opportunities to revitalize the U.S. economy.
  • Reduce the cost of childcare by allowing families — including families with stay-at-home parents  —  to fully deduct the average cost of childcare from their taxes.
Tax Proposals Affecting Individuals

Trump’s proposals would reduce the seven current tax brackets for individuals to three brackets. The tax brackets for married-joint filers are:

Taxable income less than $75,000: 12%
Taxable income more than $75,000 but less than $225,000:  25%
Taxable income more than $225,000:  33%

Tax brackets for single filers would be one-half of these amounts.

The Tax Plan states that “Low-income Americans will have an effective income tax rate of 0%.”

Trump’s proposals would retain the existing capital gains tax rate structure, with a maximum tax rate of 20%.

The Trump Tax Plan includes significant new childcare and elder care proposals, including an above-the-line deduction for children under age 13 and for elder care of a dependent. These deductions would not be available to taxpayers with total income over $500,000 for married-joint filers and $250,000 for single filers.  The Plan would also allow the establishment of Dependent Care Savings Accounts.

Other proposals described in Trump’s Tax Plan affecting individuals include the following:
  • Carried interests would be taxed as ordinary income.
  • The Affordable Care Act would be repealed, which would include the repeal of the 3.8% tax on investment income.
  • The Alternative Minimum Tax would be repealed.
  • The standard deduction for joint filers would increase to $30,000 and the standard deduction for single filers would be $15,000.
  • Personal exemptions would be eliminated.
  • Head-of-household filing status would be eliminated.
  • Itemized deductions would be capped at $200,000 for married-joint filers and $100,000 for single filers.
Tax Proposals Affecting Businesses

The Trump Tax Plan would lower the corporate income tax rate from 35% to 15% and eliminate the corporate Alternative Minimum Tax. The Tax Plan states, “This rate is available to all businesses, both small and large, that want to retain the profits within the business.”

On June 24, 2016, the House Republicans released the publication, “A Better Way — Our Vision for a Confident America,” which was intended to serve as the basis of tax reform legislation that will be “ready for legislative action in 2017.” The tax proposals described in this publication would limit the tax rate for business income earned through a sole proprietorship or a pass-through entity (such as a partnership or an S corporation) to 25%. In other words, this pass-through business income would be taxable at a maximum tax rate of 25%, even if an individual receiving the pass-through income is otherwise taxable in a higher bracket.

Previous Trump proposals contain a similar special tax rate for income from businesses that operate as pass-through entities. However, the current Trump Tax Plan on his website does not include a special rate for this pass-through income.

Other proposals described in Trump’s Tax Plan affecting businesses include the following:
  • The corporate Alternative Minimum Tax would be eliminated.
  • There would be a deemed repatriation of corporate profits held offshore at a one-time rate of 10%.
  • “Most corporate tax expenditures,” except for the research and development credit, would be eliminated.
  • Firms engaged in manufacturing in the U.S. could elect to expense capital investment and lose the deductibility of corporate interest expense. An election, once made, could only be revoked within the first three years of the election.
  • The annual cap for the business tax credit for on-site childcare would be increased to $500,000 per year (up from $150,000) and the recapture period would be reduced to five years (down from ten years).
Conclusion

The tax proposals described in President Trump’s Tax Plan include significantly lower income tax rates for individuals and businesses and other major changes.  These proposals, and the proposals described in the House Republican’s “Blueprint,” are expected to receive significant scrutiny in early 2017. Stay tuned.  

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