Things would be a lot different if they weren’t the way they are. And what tax things are is about to change. On November 9, 2016, the day after the election, House Ways and Means Committee Chairman Kevin Brady and Senate Majority Leader Mitch McConnell stated that they plan to focus on tax reform early in the next session of Congress.
The following is a summary of some of the reforms both President-elect Trump and the House Republicans have proposed.
President-elect Trump’s proposals. As of November 10, 2016, President-elect Trump’s “Tax Plan” website listed the following proposals:
For individual taxpayers:
…Tax rates for Married-Joint filers would be:
Less than $75,000: 12%
More than $75,000 but less than $225,000: 25%
More than $225,000: 33%;
…Brackets for single filers would be ½ of these amounts;
…“Low-income Americans [would] have an effective income tax rate of 0”;
…The existing capital gains rate structure (maximum rate of 20%) would be maintained, with tax brackets shown above;
…As part of the proposed repeal of the Affordable Care Act, the 3.8% tax on net investment income would be repealed;
…The alternative minimum tax (AMT) would be repealed;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;
…The estate tax would be repealed, but investment property held until death and valued over $10 million would be subject to capital gains tax, with an exemption for small businesses and family farms;
…The President-elect’s proposals include the following child care and elder care rules:
An above-the-line deduction for care expenses for children under age 13, and for eldercare for a dependent. The exclusion would not be available to taxpayers with total income over $500,000 for Married-Joint or $250,000 for Single filers;
Rebates for childcare expenses to certain low-income taxpayers through the Earned Income Tax Credit (EITC). The rebate would be equal to 7.65% of remaining eligible childcare expenses, subject to a cap. This rebate would be available to married joint filers earning $62,400 ($31,200 for single taxpayers) or less;
All taxpayers would be able to establish Dependent Care Savings Accounts (DCSAs) for the benefit of specific individuals. Total annual contributions to a DCSA would be limited to $2,000 per year from all sources. The government would provide a 50% match on parental contributions of up to $1,000 per year.
For business taxpayers:
…The business tax rate would decrease from 35% to 15%;
…The corporate AMT would be eliminated;
… A deemed repatriation of corporate profits held offshore would be taxed at a one-time rate of 10%;
…“Most corporate tax expenditures,” except for the research and development credit, would be eliminated;
…Manufacturers in the U.S. could elect to expense capital investments in exchange for giving up the deductibility of corporate interest expense. That election could only be revoked within the first three years after the election; and
…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).
The House Republicans’ “A Better Way” plan. On June 24, 2016, House Republicans released “A Better Way—Our Vision for a Confident America” that set out a number of tax reform proposals. The Republicans consider that document as the basis of tax reform legislation which will be “ready for legislative action in 2017.”
On November 9, both Chairman Brady and Speaker of the House Paul Ryan mentioned the “Better Way” plan as being taken up by Congress at the beginning of the next session of Congress.
Among its tax provisions concerning individuals, the plan would:
…reduce both the top rate (to 33%) and the number of brackets (to three);
…provide for reduced and progressive tax rates on capital gains, dividends and interest income;
…eliminate the AMT;
…consolidate a number of existing family tax benefits into a larger standard deduction and a larger child and dependent tax credit;
…continue the Earned Income Tax Credit, with improvements;
…simplify tax benefits for higher education;
…eliminate all itemized deductions except the mortgage interest deduction and charitable contribution deduction;
…continue current tax incentives for retirement savings; and
…repeal the estate and generation-skipping transfer taxes.
Business tax provisions in the congressional plan include:
…creating a new tax rate for small businesses that are organized as sole proprietorships or pass-through entities instead of taxing them at individual rates;
…reducing the corporate tax rate to 20%;
…providing for immediate expensing of the cost of business investments;
…allowing interest expense to be deducted only against interest income, with any net interest expense carried forward and allowed as a deduction against net interest income in future years (with special rules for financial services companies);
…allowing net operating losses (NOLs) to be carried forward indefinitely and increased by an interest factor, and eliminating NOL carrybacks;
…retaining the research credit;
…eliminating certain (but unspecified) special interest deductions and credits;
…moving “toward a consumption-based tax approach”; and
…providing a 100% exemption for dividends from foreign subsidiaries.
The House Republicans’ proposals include a number of IRS reforms, including provisions to:
…“streamline” the agency and reorganize it into three major units: one for families and individuals, one for business, and a new “small claims court” unit that would be independent of IRS and designed to allow routine disputes to be resolved more quickly;
…replace the Commissioner of Internal Revenue position and replace it with an Administrator, appointed by the President with the consent and advice of the Senate, for a single 3-year term;
…have a “Service First” mission; and
…commit to taxpayer assistance.
A brief comparison of the Trump and House proposals. Both the Trump and House Republicans proposals would repeal the Affordable Care Act revenue provisions, significantly lower tax rates on both individuals and businesses, eliminate the AMT, eliminate estate taxes, lessen the relevance of itemized deductions, eliminate some business credits and deductions, and toughen the rules on business interest deductions.
On the other hand, President-elect Trump emphasizes new child and elder care tax breaks, and the House Republicans do not. And, the House Republicans consider many changes to existing tax rules that President-elect Trump does not mention.
Looking into the crystal ball. At this time, no one can predict how the political winds will shape the workings of the 115th Congress that will commence in January. By example, we simply do not know at this time whether the Republicans will attempt to pass tax legislation in the Senate under the legislative process called “reconciliation” which only requires a simple majority, or will, instead, allow the Senate filibuster rules to apply to the tax legislation. Likewise, understanding the dynamics between Congressional leaders and President-elect Trump will take time. Even with the substantial overlaps between the proposals of the House Republicans and those of Mr. Trump, the future is still too murky to predict the specifics of 2017 tax legislation. What can be predicted with some certainty is that 2017 will bring significant tax legislation.
Article brought to you by:
Neil V. Birkhoff
Principal and Chair, Tax and Estate Planning Group