In a recent article we took a detailed look at how the Presidency of Donald Trump might affect the economy and markets. With Trump’s inauguration this week, now is a good time to take a look at how his Presidency might affect the U.S. tax code.
Tax Reform Might Be Feasible
With Republican control of both Houses of Congress, it might be politically possible for true tax reform to occur in the coming years. However, Republicans don’t hold a filibuster-proof 60 seats in the Senate so some compromise with Democrats on tax reform will likely be necessary.
Early last year, candidate Donald Trump unveiled a tax reform plan. While the details of the plan are still fuzzy, its broad strokes would seem to indicate that the Trump administration will likely focus on the following priorities:
- Lowering tax rates for corporations and some individuals while eliminating some tax breaks.
- Restructuring taxes on income from abroad.
- Eliminating the estate tax.
- Fully or partially repealing the Affordable Care Act, aka Obamacare.
Possible Changes Affecting Individuals
Among the changes in President-elect Trump’s tax reform plan affecting individuals are the following:
- Narrowing seven income tax brackets down to three: 12%, 25% and 33%. The current rates on long-term capital gains and qualified dividends would be adapted for the new tax brackets.
- Elimination of the head of household filing status.
- Elimination of the net investment income tax (NIIT) and the alternative minimum tax (AMT).
- Elimination of the personal exemption and expansion of child-related tax breaks.
- Elimination of the federal gift and estate tax while disallowing the step-up in basis for estates exceeding $10 million in value.
- Raising the standard deduction to $15,000 for singles and $30,000 for married couples filing jointly, more than double the current levels.
- Capping itemized deductions for single filers at $100,000 and for joint filers at $200,000.
Possible Changes Affecting Businesses
Among the changes in President-elect Trump’s tax reform plan affecting businesses are the following:
- Reduction of the top corporate income tax rate to 15% from the current 35%. Also, owners of flow-through entities like S corporations would be able to pay tax on business income at this 15% rate instead of their individual income tax rate.
- Elimination of the corporate AMT.
- Elimination of many business tax breaks, including the Section 199 domestic production activities deduction but excluding the research and development tax credit.
- Allowing U.S. manufacturers to fully expense capital investments or deduct interest payments.
- Enactment of a deemed repatriation of currently deferred foreign profits at a tax rate of 10%.
Details to Come
In the months to come, the details of any possible tax reform plan will likely become clearer as President Trump works with Congressional leaders to come up with a plan that’s politically feasible. We’ll keep you updated in future blogs on the progress of tax reform.
Meanwhile, feel free to contact us if you have any questions about taxes and your investment portfolio.