From repealing the estate tax and the AMT as well as Obamacare to reducing the corporate tax rate, advisors and tax planning experts predict that President-elect Donald Trump can move long-awaited comprehensive tax reform through next year with the help of the Republican-controlled Congress.
As Suzanne Shier, Northern Trust’s chief tax strategist and tax counsel, notes, Trump’s lengthy tax plan includes the following measures: reform the federal tax code by reducing marginal income tax rates for all individuals and businesses, increasing standard deduction amounts, repealing personal exemptions, capping itemized deductions, repealing the individual and corporate AMT, repealing the 3.8% net investment income tax (NIIT) and repealing the federal “death tax.”
However, “ambiguities still remain,” she points out, especially with regard to the “death tax” and pass-through business income tax proposals.
But Trump will have to iron out his tax plan with the House GOP one.
Indeed, Kyle Pomerleau, director of Federal Projects at the Tax Foundation in Washington, told ThinkAdvisor on Thursday that while Trump has indicated that tax reform would be “his first priority, it is unclear how long it would take.”
The House GOP plan and the Trump plan “have their similarities,” Pomerleau said, but “there are still a few details that need to be hammered out. Most obviously is the difference in the size.”
The Trump plan would cut taxes by up to $6 trillion over the next decade, Pomerleau said, whereas the House GOP plan would reduce revenue by $2.4 trillion. “The biggest reason for this difference is base broadeners, or what deductions and exemptions are eliminated. The Trump plan does not significantly limit, say, itemized deductions; the House GOP plan does.”
Pomerleau also points out that “there are also slight differences in how the plans treat businesses that would need to be figured out, especially in terms of how the tax code should treat pass-through businesses and the foreign profits of U.S. multinationals.”
Common ground in President-elect Trump’s tax proposals and the House GOP’s “A Better Way” tax reform proposal, also includes “overall simplification and rate reduction,” Shier told ThinkAdvisor.
“Both proposals would reduce the number of individual ordinary income tax brackets from 7 to 3, with a top ordinary income tax rate of 33%, repeal the 3.8% net investment income tax and the alternative minimum tax, lower the corporate income tax rate and repeal the estate, gift and generation-skipping transfer taxes (with a carryover of basis inherited assets for income tax).”
Areas for compromise and alignment, Shier noted, are in how capital gains are taxed, how itemized deductions will be limited, and how low the corporate income tax rate will go -- 15% or 20%.
Russell Sullivan, a partner in McGuireWoods’ Washington office and a senior adviser to McGuireWoods Consulting, said that tax cuts are part of Trump’s economic growth plan, adding that Trump has promised to get growth up from its current 2%. Sullivan said he expects “an early and a big push” for an economic growth plan as “one of the first things out of the chute.”
“With Republican majorities in both houses of Congress, it’s more likely to proceed,” he said.
Business tax reform is also on Trump’s agenda, Sullivan said, including international, domestic and corporate tax reforms. “He has proposed a fairly bold plan to achieve that.”
Sheir notes in her Wednesday Wealth Planning insights that part of Trump’s business tax reform includes reducing the corporate income tax rate from 35% to 15%, with the reduced tax rate “available to all businesses, both big and small, that want to retain the profits within the business.”
However, she points out that “it is unclear whether to interpret this to mean that the 15% tax rate would apply to all business income or only to businesses that are organized as C corporations, with the ordinary individual tax rates applying to the income of pass-through businesses, such as partnerships and S corporations.”
Sullivan expects the Trump administration will work to encourage companies with international business to bring profits back to the United States.
“He’s going to want to do something that promotes the ability of companies to be able to invest here in the United States,” Sullivan said. He predicted that it might include building on a plan that was originally proposed by former House Ways and Means Committee Chairman David Camp, R-Mich., which would “revive international taxation but then have companies that have left profit overseas because they’re not taxed until they’re repatriated to the U.S., to bring those back to the U.S.”
Some Democrats, particularly Sen. Chuck Schumer of New York, have indicated they would support business tax reforms that brought profits from international companies back to the U.S., “provided that then it’s taxed at some rate [and] that those additional revenues are used at least partially to invest in domestic infrastructure,” Sullivan added.
Trump also proposed during his campaign that he would tax carried interest as ordinary income.
As for individual tax rates, besides repealing the individual AMT, Trump has proposed the following:
- Increase the standard deduction from $6,300 to $15,000 for single filers and from $12,600 to $30,000 for married couples filing jointly, eliminating personal exemptions.
- Cap itemized deductions at $100,000 for single filers and $200,000 for married joint filers.
- Tax carried interest income at ordinary income tax rates.
If Trump successfully brings about repeal or significant reform of the Affordable Care Act, Sullivan suggested the 3.8% tax on net investment income might be eliminated.
But as noted by Wolters Kluwer’s Wednesday post-election tax update, Trump has not said how he would handle the “Cadillac tax,” on high dollar tax health insurance plans, which is set to go into effect in 2020. Wolter Kluwer opines that repeal of the Affordable Care Act would “presumably” include repeal of the “Cadillac tax.”
Sullivan added that bipartisan proposals to force inherited IRAs over $450,000 to be paid out over five years “may be dead before it even advanced very far.”
As for interest in repealing the estate and gift taxes, Sullivan noted that “most people, even Republicans, believe that will be difficult” because the Senate lacks the 60 votes “necessary to overcome a filibuster.”
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