What can you expect regarding changes to the tax system in 2017? Monica Sullivan of TD&T’s Tax Department provide some thoughts on what to look for from Congress and the Trump Administration this year.
Many Americans have had tax reform on their minds. Both major Presidential candidates made tax reform part of their platforms and campaigns. With a single party now in control of the U.S. Senate, U.S. House of Representatives, and the White House, the Federal government is aligned to pass comprehensive tax reform legislation more easily in 2017.
Two Major Plans to Consider
Currently, two major proposed tax reform plans have received the most attention – the Republican House Blueprint, and President Trump’s plan. The plans have many similarities, but also a few key differences.
House Speaker, Paul Ryan, introduced the House plan, “A Better Way,” in June of 2016. It has been well received among his fellow Republicans. Trump’s plan was introduced during his Presidential campaign and then revised in September 2016. The goals of both plans are to simplify and lower tax for American families and businesses. Plan supporters say the plans would in turn generate growth for job creators and create a pro-American approach for global competitiveness. The House plan also calls for an overhaul of the IRS, to make it more customer service focused.
Similarities Between the Plans
Other similarities between the plans include:
- Reduce personal tax brackets from the current 7 to 3, with the top bracket at 33%
- Reduce the top corporate tax rate, from 35% to 15% (Trump plan) or 20% (House plan)
- Repeal the Alternative Minimum Tax (AMT)
- Replace personal exemptions with an increased dependent care deduction/credit
- Significantly increase the standard deduction
- Provide the ability to currently deduct capital expenditures vs. depreciation
- Trump’s plan calls for only manufacturers to be able to use the current deduction
- Largely repeal business tax credits and the Sec. 199 Domestic Production Activities Deduction (DPAD), but leave the R&D Credit. The DPAD, established by the
- American Jobs Creation Act of 2004, offers a tax reduction for companies that engage in certain domestic manufacturing or production activities.
- Offer a one-time mandatory low rate deemed repatriation tax on foreign subsidiaries of US companies, with payments spread over 8-10 years. This would
- provide an incentive for companies to bring profits held offshore back to the U.S. instead of sheltering those profit abroad where they are not liable for U.S. taxes.
- Repeal Estate and Gift taxes
- Introduce changes to limit interest expense deduction
Differences Between the Plans
Though the plans have similar intentions, some of the differences could cause some negotiating. The most notable of these involve international taxation. Trump’s plan would keep the current “worldwide” approach, but has mentioned heavy tariffs on imports. The House plan would change to a “territorial” approach, adding in border adjustments – a method similar to that used in other countries. In addition, Subpart F income, regarding the taxation of certain kinds of income earned through controlled foreign corporations, would be repealed under the House plan.
Some other differences include:
- While corporate rates have common goals, pass-through businesses (partnerships, S Corporations, etc.) have differing treatments between the plans. The House plan tops pass-through income at 25%, while Trump’s plan has been unclear and has floated the idea of a 15% top rate.
- The House plan would change net operating losses (eliminating the carryback, but allowing unlimited carryforward at 90%), however Trump’s plan remains silent on the issue.
- The House plan also eliminates itemized deductions, except for mortgage interest and charitable deductions. Trump’s plan keeps itemized deductions, but caps them at $100k/$200k (Single/Married Filing Jointly).
- The Head of Household filing status would be removed under Trump’s plan.
- Trump’s plan would eliminate the step-up basis after estates reach $10M.
- The House plan would tax capital gains and dividends as ordinary income, but would also provide a 50% exclusion of investment income (making it equivalent to taxing the income at half the ordinary rate). Trump’s plan keeps the 0-20% rates, adapting to his proposed new tax brackets.
Who Benefits from the Changes?
Potential winners under these plans would be high income earners, between the top rate cuts and the repeal of the estate tax. Low income earners also could see a windfall in these plans, as essentially the 0% bracket will expand because of the increase in the standard deduction. Child care users also fare well in these plans with the increased dependent care deductions and credits.
But while most taxpayers expect to see some increase in after-tax income, there could be negative impact for some individuals and businesses. For example, large families who do not use childcare credits could see an increase in tax due to the removal of personal exemptions. Manufacturers utilizing DPAD could see a negative change, however reduced tax rates and the possibility to currently deduct capital expenditures would likely mitigate. Green energy industry companies and users could be negatively impacted if the related business tax credits are repealed or allowed to expire. Another debatable effect is on the housing market, as the raised standard deduction makes the mortgage interest deduction less important for taxpayers who itemize. However, plan proponents expect the forecasted boost to the economy will mitigate the effect.
With all that said, so much still remains unclear. There has not been tax reform of this magnitude in thirty years. It will take time to iron out the details and ultimately become law. In addition, it’s anticipated that special interest groups who stand to lose will put up a fight to keep deductions and credits. There is a lot of negotiating to take place. Recently, Trump has announced that the unveiling of his tax reform plan as President will be coming soon, however, has offered little details. It is expected his plan as President will remain similar to that of the plan released during his campaign. It will be interesting to see what the final outcome will be.