By Evan Gernant
With Donald Trump set to move into the United States Presidency in January of 2017 and Republicans retaining control of both houses of Congress, the chances of us seeing significant tax legislation in the near term are likely. During his campaign, president-elect Trump put forward various proposals for substantial changes to the United States tax code. Furthermore, in June of 2016, House Republicans issued their “blueprint” for tax reform. Many of the Trump and House tax proposals are the same or similar, however, since tax legislation must start in the House we will likely start with the House proposals and end up with some modified version after negotiations conclude. Below is a summary of the major tax proposals.
Business Tax Proposals
- Both Trump and the House have proposed to lower corporate tax rates. Trump has proposed a flat 15% corporate tax rate for “all businesses,” while the House proposed a flat corporate rate of 20%. The House also included a flat 25% rate on business income earned by partnerships and S corporations.
- Both Trump and the House have proposed similar provisions to allow manufacturing businesses to immediately expense certain capital expenditures, while limiting interest expense in some manner.
- The House (but not Trump) proposed modifying the net operating loss rules to eliminate the carryback period, but extending the carryforward period indefinitely. The loss carryforward available would be 90% of taxable income.
- Both Trump and the House proposed repealing the corporate alternative minimum tax.
- Trump proposed tax incentives for infrastructure.
- Both Trump and the House proposed incentivizing multi-national companies with significant overseas earnings to repatriate those earnings at a discounted tax rate. Trump proposed a one-time 10% tax rate. While the House proposed a rate slightly less than Trump, its proposal would also revise the rules to exempt future dividends from foreign subsidiaries from tax.
Individual Tax Proposals
- Both Trump and the House would reduce individual ordinary income tax rates across the board. The new tax brackets would include a 12%, 25% and 33% bracket.
- Both Trump and the House would eliminate personal exemption deductions and increase the standard deduction in some form.
- Both Trump and the House would reduce itemized deductions. Trump would limit itemized deductions to $200,000 for joint taxpayers and $100,000 for single taxpayers. The House would eliminate certain itemized deductions while keeping and modifying the mortgage interest and charitable contributions deductions.
- Both Trump and the House proposed expanding tax benefits for childcare and dependent eldercare.
- Trump proposed to eliminate the carried interest rules, taxing such earnings at individual ordinary rates. Alternatively, the House proposed some modification for pass-through entities, taxing a “reasonable compensation” amount at ordinary rates.
- Both Trump and the House proposed repealing the alternative minimum tax on individuals.
- Both Trump and the House proposed repealing the net investment income tax on individuals.
- Trump proposed to keep the maximum capital gains tax rate at 20%. The House would tax capital gains at one-half the ordinary tax rates. Therefore, the maximum capital gain tax rate would effectively be 16.5% (i.e. ½ of 33%).
- Both Trump and the House proposed repealing the estate tax, however, Trump’s proposal would retain some form of tax on capital gains at death in excess of $10 million.
With all the uncertainty surrounding Trump’s presidency it is difficult to gauge what proposals will be enacted into law and in what form. It should also be noted that there are various tax provisions and incentives set to expire at the end of this year. We are interested in seeing how the current “lame duck” session of Congress will address these expiring provisions. Will they pass an extenders bill or let them expire and address them in new legislation after Trump is sworn in? However it plays out, most are in agreement that we are likely to see significant changes in tax law due to Republican control of the government. After the transition of the White House to Trump concludes in January, we hopefully will receive more details on tax legislation in order to further weigh the impact on businesses and individuals more precisely.