In April, 2017 President Donald Trump presented an outline of his proposed tax cuts to the American People--"The 2017 Tax Reform for Economic Growth and American Jobs." The President's proposal asks Congress to consider large tax cuts for both Businesses and Individuals. The initial White House information, indicated in a one page document, consisted of broad principals, with specifics to be developed in the near future. The summary of the plan provided to reporters states that "through the month of May, The Trump Administration will hold listening sessions with stakeholders to receive their input and will continue working with the House and Senate to develop the details of a plan that provides massive tax relief, creates jobs, and makes America more competitive -and can pass both chambers."
INDIVIDUAL INCOME TAX RATES
President Trump's proposal reduces the current tax rate structure for individuals from tax rates at 10, 15, 25, 28, 33, 35 and 39.6 percent to a new tax rate system of 10, 25 and 35 percent. To date, there have been no stated income brackets for each of the proposed tax rates.
INDIVIDUAL STANDARD DEDUCTION
The proposal doubles the current standard deduction, which is $6,350 for single filers and $12,700 for those filing jointly to $12,700 and $25,400 respectively.
ITEMIZED AND ABOVE THE LINE DEDUCTIONS
President Trump's proposal would eliminate many itemized and "above the line" deductions, leaving the mortgage interest and charitable contributions, and deductions for retirement savings.
ELIMINATION OF REFUNDABLE TAX CREDITS
Three individual credits--the earned income credit, the child tax credit and the American Opportunity Tax Credit could be eliminated under the Trump plan.
CAPITAL GAINS AND DIVIDEND INOME
It is believed that under the current proposal, the capital gains and dividend tax rate will remain at 20 percent.
REPEAL OF THE 3.8 PERCENT NET INVESTMENT INCOME TAX
The Affordable Care Act added an additional 3.8 percent tax for high income taxpayers with investment and capital gain income. The current proposal will eliminate what is commonly called the "Obamacare Tax."
INCENTIVES FOR FAMILIES
President Trump's proposals indicate that yet-to-be determined tax relief will be provided for families with child and dependent care expenses.
THE ALTERNATIVE MINIMUM TAX
One of the key provisions of the proposal is the elimination of the Alternative Minimum Tax, also known as the AMT. This tax was originally added so that taxpayers with substantial income pay some income tax. However, under the current tax code and rates, many high income taxpayers are burdened with calculating their tax under two methods, with an increasing number of taxpayers being required to pay the higher alternative minimum tax in some cases.
What does this mean to individual taxpayers? If the standard deduction is doubled, White House estimates a simplified tax filing by reducing by one-half the number of taxpayers currently itemizing their tax deductions. If the itemized deductions for medical, taxes and miscellaneous expenses are eliminated, more taxpayers will be pushed into the standard deduction option. It's possible that many of the "above the line" deductions, such as educator expenses, moving expenses, health insurance deductions for the self-employed and student loan interest many be eliminated. The proposal also calls for the elimination of tax breaks for the wealthiest taxpayers, but does not list specifics in plan.
TAX ON BUSINESSES
The current proposal calls for a 15 percent corporate income tax rate. This rate will fall to a level far lower the current 35 percent rate. There is also the proposed elimination of unnamed tax breaks for special interests expected to prevent businesses an effective tax rate lower that the proposed 15 percent rate.
The owners of S corporations, partnerships and sole proprietorships pay tax at the individual tax brackets which are as high as 39.6 percent. President Trump proposes to reduce the tax rate on these entities to the 15 percent tax bracket. To prevent company owners from shifting compensation to profits distribution, a second layer tax would be imposed on business owners who withdraw dividends, as is done currently with C corporation dividends.
BUSINESS DEPRECIATION AND CREDITS
The President's current proposal does not address the future of significant business incentives such as bonus depreciation and expensing of capital improvements, or such incentives as the research credit. In addition, there is no mention of energy tax incentives.
ONE TIME REPATIRATION TAX
Today, U. S. based corporations pay tax on their worldwide profits, even though profit is earned outside of the U. S. Companies with overseas operations would be allowed to transfer money to the United States with a lower, one-time tax, although the proposal does not specifically state a tax rate.
THE ESTATE TAX
The Treasury currently taxes a decedent's estate based on the value of assets held at the time of death. Under current law, if a decedent dies with a taxable estate, the tax rate is 40 percent of the value of the assets. President Trump's proposal calls for the elimination of the Estate Tax.
Congress, as of the date of this writing has not voted on any part of the proposal, although it appears the Senate Finance Committee and the House Ways and Means Committee are discussing the proposal. The administration's outline leaves many unanswered questions. There will be much more press about the proposals in the weeks and months ahead.
Gerard J. Kassouf, CPA serves as the Managing Director of Kassouf & Co. and is a Director of the Healthcare Services Group.