Trump tax plan: how could you be impacted?

Your Guide to State, Local, Federal, Estate + International Taxation

Trump, tax reform, tax law, tax legislationPresident Trump is attempting to make good on his campaign promise to overhaul the tax code. In his proposal released last Wednesday, the President outlined his plans to provide Americans with “the biggest individual and business tax cut in American history.”

So, how will Trump’s plan impact taxpayers (like you) if it’s passed?

INDIVIDUALS

TAX RATES. Under current law, ordinary income (your wages and interest) are paid at a graduated rate, meaning that as your income increases so does your tax rate. There are currently seven rates stretching from 10 percent to 39.6 percent, with the top rate kicking in at $470,000 (if married, and $418,000 if single). However, the top rate, really isn’t the top rate because of the Net Investment Income Tax, or NIIT as it’s called in the “biz”. The NIIT is an additional 3.8 percent surtax on net investment income such as interest, dividends, rents, and royalties bringing the real to rate to 43.4 percent. (However, under tax law, not all income is created equal. Certain types of income, namely qualified dividends and long-term capital gains are taxed at lower rates between 15 and 20 percent, before tacking on the NIIT.)

President Trump’s plan replaces the current seven tax rates with three: 10 percent, 25 percent and 35 percent. Not only does the highest rate drop from 39.6 percent to 35 percent, but the plan also calls for the repeal of the NIIT. As a result the top rate would be a true 35 percent.

AMT. The alternative minimum tax, or AMT, is an additional tax imposed on certain taxpayers whose income exceeds a certain threshold. It was put in place to prevent the wealthy from artificially reducing their tax bill through the use of tax preference items. Trump’s plan repeals the AMT.

ESTATE TAX. Under current law, if you die with an estate valued over $5,490,000 ($10,980,000 for married couples), your estate pays a 40 percent tax on the excess. President Trump’s plan completely eliminates the estate tax, allowing decedents to pass money to their heirs tax free.

DEDUCTIONS. One of Trump’s tax reform objectives is to simplify the tax code and the administrative burden of filing one’s taxes. His plan attempts to accomplish this by doubling the standard deduction so fewer taxpayers have to itemize. For those who continue to itemize their deductions, the proposal limits itemized deductions to mortgage interest and charitable contributions.

BUSINESSES

C-CORPS. Under current tax law, C-Corporations are subject to double taxation. They are first taxed on their profits at the corporate level and individuals pay tax when the money is distributed as dividends or salary. Trump’s plan reduces the corporations’ tax rate from 35 percent to 15 percent.

PASS-THROUGH ENTITIES. Not all businesses are C-Corporations. Businesses can use other structures like partnerships, LLC’s or S-Corps to pass the earnings to the owners, with no tax at the company level. The owners report the income on their 1040 and are taxed at their ordinary rate. The President’s plan does not specifically mention pass-through entities, but when he was a candidate, Trump’s tax plan included a provision that would allow owners of pass-troughs to be taxed at the proposed 15 percent corporate rate.

MULTINATIONAL COMPANIES. Under current tax laws, U.S. companies must pay taxes on all profits, no matter where they are earned. Trump’s proposal calls for a territorial system which would exclude foreign earned income. It also imposes a reduced rate “one-time” tax on corporate earnings held overseas.

While we wait for the details of the plan to come out, the White House issued a summary which can be found here.

Lauren J Sweeney, JD