Heads Up!

November 15th, 2016

FIRST 100 DAYS:

During the campaign, 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 percent tax cut and lower the “business tax rate” from 35 percent to 15 percent. During the campaign, Trump described the plan as “an economic plan designed to grow the economy 4 percent per year and create at least 25 million new jobs through massive tax reduction and simplification.”
    * Click here to jump to details at the bottom of this post.
  • 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 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, and private investments through tax incentives, to spur $1 trillion in infrastructure investment over 10 years.”

RECOMMENDED ACTIONS: In summary, the legislative plan outlined above is good for stock prices. Not so for bonds. It is likely interest rates will rise and the magnitude of the increase could be substantial.  When interest rates rise, the value of bonds you already own go down. It is important to reduce holdings of long term maturity bonds or mutual funds which hold this type of bond.

IMPORTANT DETAILS FOLLOW BELOW:

Trump’s Win Expected to Bring Tax Law Changes

INDIVIDUAL TAXATION

Income Tax
During the campaign, Trump proposed to compress into only three tax brackets the current seven tax brackets, which currently tops out at 39.6 percent. Trump’s proposal would reduce rates on ordinary income to 12, 25, and 33 percent.

Comment
Trump’s tax plan for three-bracket tax rate structure of 12, 25, and 33 mirrors the House GOP Tax Reform Blueprint released in June 2016. Trump has not specified the income levels within which each bracket percentage would fall.

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.

PROJECTED IMPACT.

One result of increasing the standard deduction would likely be to reduce the number of taxpayers who itemize deductions.

Capital Gains/Dividends
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 3.8 percent net investment income (NII) tax imposed on passive income, including capital gains.

INDIVIDUAL INCOME TAX RATES
Current Rates Trump/GOP Rates Joint Filers: Blueprint Single Filers: Blueprint
10% 15% 0%/12% up to $75,300 up to $37,650
25% & 28% 25% up to $231,450 up to $190,150
33%, 35% & 39.6% 33% above $231,450 above $190,150

PROJECTED IMPACT.

The current capital gains rate structure, imposed based upon income tax brackets, would presumably be realigned to fit within Trump’s proposed percent income tax bracket levels.

Estate and Gift Tax
During the campaign, Trump proposed to repeal the federal estate and gift tax. The unified federal estate and gift tax kicks in at $5.490 million for 2017 (essentially double at $10.980 million for married individuals),

PROJECTED IMPACT.

During the campaign, Trump also added to estate and gift tax repeal a proposal that would disallow “stepped up basis” to shelter otherwise taxable gains of more than $10 million under the income tax. Currently, any asset that passes through an estate receives a tax basis equal to date of death value, a significant tax advantage when the asset is eventually sold by heirs. Trumps plan would appear to provide exemptions for small businesses and family farms.

Alternative Minimum Tax (AMT)
During the campaign, Trump proposed to eliminate the alternative minimum tax (AMT).

Comment
National Taxpayer Advocate Nina Olson has recommended Congress permanently repeal the AMT. Although it serves as a revenue source, significant tax reform would likely present other options to offset the cost of elimination.

Net Investment Income (NII) Tax
During the campaign, Trump proposed to repeal the Affordable Care Act (ACA). Repeal of the ACA would include repeal of the 3.8 percent net investment income (NII) tax.

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 also proposed during the campaign to create Dependent CARE Savings Accounts (DCSAs), tax-favored savings accounts for children, including unborn children, and dependent care expenses, which would be matched by a government contribution. The savings accounts would have an annual contribution limit. Trump’s plan would also expand the credit for employer-provided child care.

Carried Interest
Trump proposed during the campaign to tax carried interest as ordinary income.

PROJECTED IMPACT.

Private equity partners have been taxed at 20 percent, the current top rate for capital gains.

BUSINESS TAXATION

Corporate Income Tax
During the campaign, Trump proposed to lower the business tax rate to 15 percent and eliminate the corporate alternative minimum tax.

Comment
The top corporate income tax rate is currently 35 percent.

Small Businesses
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 percent on their pass-through income retained within the business, rather than be taxed under regular individual income tax rates (the top individual rate would be 33 percent under Trump’s plan).

PROJECTED IMPACT.

This plan would appear to give a business quasi-corporate status in being able to be taxed at a new 15 percent 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.

Comment
Trump’s campaign materials also indicated a consideration of rules that would prevent pass-through owners from converting their compensation income taxed at higher rates into profits taxed at the 15 percent level.

Business Tax Incentives
According to campaign materials, unspecified “corporate tax expenditures” would be eliminated, except for the Research and Development (R&D) credit, in exchange for a lower corporate tax rate.

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.

Manufacturing expensing
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.

HEALTHCARE RELATED TAXES

Trump proposed throughout the campaign to “repeal and replace Obamacare,” the Affordable Care Act (ACA), entirely, including all associated taxes. Trump’s campaign materials, however, only mention repealing the ACA’s 3.8 percent NII tax.

Comment
During the campaign, Trump indicated that he would call a special session of Congress to repeal the ACA.

Cadillac tax. Under current law, the so-called “Cadillac tax” on high dollar health insurance plans is scheduled to go into effect in 2020. Trump has not mentioned this tax specifically but repeal of the ACA would presumably include repeal of the “Cadillac tax.”

Medical device tax. As part of ACA repeal, Trump’s plan would apparently envision repeal of the medical device tax.

Comment
Repeal of the ACA would also bring about repeal of the individual shared responsibility requirement, the employer shared responsibility requirement, the Code Sec. 36B premium assistance tax credit, the Health Care Marketplace, the SHOP Marketplace, and more.

INTERNATIONAL

During the campaign, Trump indicated that one direct result of lowering the corporate income tax rate would be to make US companies more competitive worldwide, as well as keep US companies onshore.

Repatriation
During the campaign, Trump proposed to provide a deemed repatriation of corporate profits held offshore at a “one-time” reduced tax rate.

SOURCE: Commerce Clearing House

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