Donald Trump’s election as the 45th President of the United States on November 8th is expected to bring changes to the tax laws for individuals and businesses. President-elect Trump had made tax reduction a centerpiece of his economic plans during his campaign, saying he would, among other things, propose lower and consolidated individual income tax rates, expand tax breaks for families, and repeal the Affordable Care Act. As the next few weeks and months unfold, taxpayers will learn more about Trump’s tax plans.
During the campaign, President-elect Trump released an outline detailing his plans for his first 100 days in office. Within the “100-day plan presentation,” Trump listed several tax proposals to immediately work with Congress on enacting:
- The Middle-Class Tax Relief and Simplification Act – According to Trump, the legislation would provide middle class families with two children a 35% tax cut and lower the “business tax rate” from 35% to 15%. During the campaign, Trump described the plan as “an economic plan designed to grow the economy 4% per year and create at least 24% million new jobs through massive tax reduction and simplification.”
- Affordable Childcare and Eldercare Act – A proposal described by Trump during the campaign that would allow individuals to deduct childcare and elder care from their taxes, incentivize to deduct childcare and elder care from their taxes, incentivize employers to provide on-site childcare and create tax-free savings accounts for children and elderly dependents.
- Repeal and Replace Obamacare Act – A proposal made by Trump during the campaign to fully repeal the ACA.
- American Energy & Infrastructure Act – A proposal described by Trump during the campaign that “leverages public private partnerships, private investments through tax incentives, to spur $1 trillion in infrastructure investment over 10 years.
During the campaign, Trump proposed to compress into only three tax brackets the current sevel tax brackets, which currently tops out a 39.6%. Trump’s proposal would reduce rates on ordinary income to 12, 25, 33%.
Under Trump’s plan, the standard deduction would increase to $15,000 for single individuals and to $30,000 for married couples filing jointly. In contrast, the 2017 standard deduction amounts under current law are $6,350 and $12,700, respectively as adjusted for inflation.
Trump also proposed during the campaign to implement a cap on the amount of itemized deductions that could be claimed at $100,000 for single filers and $200,000 for married couples filing jointly. Additionally, according to campaign materials, all personal exemptions would be eliminated, as would the head of household filing status.
Capital Gains & Net Investment Income (NII)
The current rate structure for capital gains would apparently remain unchanged under Trump’s plan. Trump presumably would also retain the same rates for qualified dividend income. However, Trump has proposed to repeal the 3.5% net investment (NII) tax imposed on passive income, including capital gains, in his proposal to repeal the Affordable Care Act (ACA).
Alternative Minimum Tax (AMT)
During the campaign, Trump proposed to eliminate the alternative minimum tax (AMT).
Childcare Tax Benefits
Trump proposed during the campaign to create a new deduction for child and dependent care expenses, as well as increasing the earned income tax credit (EITC) for working parents who would otherwise not qualify for the deduction. Trump’s plan, as explained during his campaign, would provide:
- “Spending rebates” to lower-income families for childcare expenses through the EITC. “The rebate would be equal to a certain percentage of remaining eligible childcare expenses, subject to a cap of half of the payroll taxes paid by the taxpayer,” according to campaign materials.
- “Above-the-line” deductions for child and elder care expenses, for qualified taxpayers with income up to certain thresholds.
Trump proposed during the campaign to tax carried interest as ordinary income.
Corporate Income Tax
During the campaign, Trump proposed to lower the business tax rate to 15% and eliminate the corporate alternative minimum tax.
Trump’s campaign materials about how pass-through entities (sole proprietorships, partnerships, and S Corporations) would be taxed are broad-brush. Generally, Trump’s campaign materials indicate that the owners of pass-through entities could elect to be taxed at a flat rate of 15% on their pass-through entities retained within the business, rather than be taxed under regular individual income tax rates (the top individual rate would be 33% under Trump’s plan).
This plan would appear to give a business quasi-corporate status in being able to be taxed at a new 15% corporate tax rate until assets are distributed. Upon distribution, a second layer of tax would be imposed similar to dividends now taxed to C Corporation shareholders.
Business Tax Incentives
Section 179 Expensing
Specifically directed toward small businesses, Trump during the campaign indicated that he would increase the annual cap on Section 179 expensing from $500,000 to $1 million.
Childcare Credit for Businesses
During the campaign, Trump proposed to increase the annual cap for the business tax credit for on-site childcare. Additionally, the recapture period would be reduced.
In lieu of deducting interest expenses, Trump proposed during the campaign that manufacturing firms would be able to immediately deduct all new investments in the business.
During the campaign, Trump proposed to provide a deemed repatriation of corporate profits held offshore at a “one-time” reduced tax rate.