Starting January 20, 2017, Republican Donald Trump will be our 45th President of the United States. He will also have a Republican controlled House and Senate to work with regarding his attempt to repeal some current tax law, create new tax legislation, or amend some current tax law for the country.

President-elect Trump’s tax plan has many similarities to the House Republican’s “A Better Way” plan. Given the similarities of the two plans and a Republican controlled House and Senate, some type of significant tax legislation in 2017 appears likely. Obviously, only time will tell. The Democrats in the House and the Senate will need to be included in some decision-making tax issues if the Republicans expect to pass any type of significant tax legislation.

Below is a brief summary of President-elect Trump’s major tax proposals from his “President-elect Trump’s tax Plan” website. Followed by the House Republican’s “A Better Way” plan. There is much to digest below. Please don’t hesitate to contact your Somerset advisor regarding the potential legislation including how this potential legislation may impact your 2016 year-end tax planning.

President-elect Trump’s tax Plan from his website:

For individual taxpayers:

  • Tax rates and breakpoints for Married-Joint filers would be:
    • Less than $75,000: 12%
    • More than $75,000 but less than $225,000: 25%
    • More than $225,000: 33%;
  • Brackets for single filers would be ½ of these amounts;
  • Low-income Americans would have an effective income tax rate of 0;
  • The existing capital gains rate structure (maximum rate of 20%) would be maintained, with tax brackets shown above;
  • Carried interest would be taxed as ordinary income;
  • The Affordable Care Act would be repealed; as part of this repeal, the 3.8% tax on investment income would be repealed;
  • The alternative minimum tax (AMT) would be repealed;
  • The standard deduction for joint filers would increase to $30,000, and the standard deduction for single filers would be $15,000;
  • Personal exemptions would be eliminated;
  • Head-of-household filing status would be eliminated;
  • Itemized deductions would be capped at $200,000 for Married-Joint filers and $100,000 for Single filers;
  • The estate tax would be repealed, but capital gains on property held until death and valued over $10 million would be subject to tax, with an exemption for small businesses and family farms. To prevent abuse, contributions of appreciated assets into a private charity established by the decedent or the decedent’s relatives would be disallowed.

For business taxpayers:

  • The business tax rate would decrease from 35% to 15%;
  • The corporate AMT would be eliminated;
  • There would be a deemed repatriation of corporate profits held offshore at a one-time tax rate of 10%;
  • Most corporate tax expenditures, except for the research and development credit, would be eliminated;
  • Firms engaged in manufacturing in the U.S. could elect to expense capital investment and lose the deductibility of corporate interest expense. An election once made could only be revoked within the first three years of election; and
  • The annual cap for the business tax credit for on-site childcare would be increased to $500,000 per year (up from $150,000), and the recapture period would be reduced to five years (down from ten years).

Child care and elder care rules:

  • An above-the-line deduction for children under age 13, which would be capped at state average for age of child, and for eldercare for a dependent. The exclusion would not be available to taxpayers with total income over $500,000 for Married-Joint or $250,000 for Single;
  • Rebates for childcare expenses to certain low-income taxpayers through the Earned Income Tax Credit (EITC). The rebate would be equal to 7.65% of remaining eligible childcare expenses, subject to a cap. This rebate would be available to married joint filers earning $62,400 ($31,200 for single taxpayers) or less;
  • All taxpayers would be able to establish Dependent Care Savings Accounts (DCSAs) for the benefit of specific individuals, including unborn children. Total annual contributions to a DCSA would be limited to $2,000 per year from all sources. The government would provide a 50% match on parental contributions of up to $1,000 per year for these households.

House Republican’s “A Better Way” Plan

For individual taxpayers:

  • Reduce both the top rate (to 33%) and the number of brackets (to three);
  • Provide for reduced and progressive tax rates on capital gains, dividends and interest income;
  • Eliminate the AMT;
  • Consolidate a number of existing family tax benefits into a larger standard deduction and a larger child and dependent tax credit;
  • Continue the EITC, but look for ways to improve it;
  • Simplify tax benefits for higher education;
  • Eliminate all itemized deductions except the mortgage interest deduction and charitable contribution deduction;
  • Continue current tax incentives for retirement savings; and
  • Repeal the estate and generation-skipping transfer taxes.

For business taxpayers:

  • Creating a new business rate for small businesses that are organized as sole proprietorships or pass-through entities instead of taxing them at individual rates;
  • Reducing the corporate tax rate to 20%;
  • Providing for immediate expensing of the cost of business investments;
  • Allowing interest expense to be deducted only against interest income, with any net interest expense carried forward and allowed as a deduction against net interest income in future years (with special rules that will apply for financial services companies);
  • Allowing net operating losses (NOLs) to be carried forward indefinitely and increased by an interest factor, and eliminating NOL carrybacks;
  • Retaining the research credit (but evaluating options to make it more effective);
  • Generally eliminating certain (but unspecified) special interest deductions and credits;
  • Shifting to a territorial tax system;
  • Move toward a consumption-based tax approach;
  • Providing a 100% exemption for dividends from foreign subsidiaries; and
  • Generally simplify international tax rules, including elimination of most of the subpart F rules.

Child care and elder care rules:

  • Repeal the Affordable Care Act;
  • Make the following changes to health savings accounts (HSAs): allow spouses to make catch-up contributions to the same HSA account; allow qualified medical expenses incurred before HSA-qualified coverage begins to be reimbursed from an HSA account as long as the account is established within 60 days; set the maximum contribution to an HSA at the maximum combined and allowed annual deductible and out-of-pocket expense limits; and expand accessibility for HSAs to certain groups (e.g., those who get services through the Indian Health Service and TRICARE);
  • Allow certain purchasing platforms, like private exchanges, to expand. The plan would encourage the use of direct or “defined contribution” methods, such as health reimbursement accounts (HRAs);
  • Encourage the portability of health insurance. Everyone would have access to financial support for an insurance plan chosen by the individual, which could be taken with them job-to-job, to non-work environments and into retirement years. For those who do not have access to job-based coverage, Medicare, or Medicaid, the proposal would provide a refundable tax credit. The portable payment would be increased as the recipient aged.

Please contact Somerset CPAs and Advisors with any questions.