Authored by: Paul Dillon, Michelle Hobbs and Mike Schiavo
Following the election, speculation is mounting as to what the major tax legislation and tax cuts will be in 2017 with Donald Trump in office and Republicans in control of both houses of Congress. While it is too early to know if significant tax reform will be enacted, some key proposals made during the campaign and in recent discussions of Trump’s “100-day” plan are discussed below.
Keep in mind House Majority Leader Kevin McCarthy told Bloomberg BNA on Nov. 14 that while no decisions have been made yet, “we’ve put a lot of work into this tax plan that we’d like to see in overall tax reform we think helps the economy grow more.”In addition, these proposals could likely face a filibuster in the Senate requiring compromise with the Democrats. There has been some speculation that the tax package and Affordable Care Act (ACA) repeal could be accomplished via budget reconciliation, which is not subject to the filibuster rule. However, there are restrictions on using reconciliation. Specifically, that tax provisions sunset before the end of the 10-year budget window. In other words, if reconciliation is used, tax provisions would expire similar to the Bush tax cuts.
In regard to infrastructure spending, President-elect Trump proposed $1 trillion in infrastructure to improve America’s transportation system, water system, electrical grid, etc. No specific funding mechanism has been proposed for this cost, although speculation is that repatriation of foreign earnings would be used as a funding source. However, some congressional leaders have expressed a desire to use repatriation funds to help reduce the overall corporate tax rate. Furthermore, some Republican House members have questioned the size of Trump’s proposed rate reductions as they would add too much to the federal budget deficit. Consequently, we can expect ongoing negotiations between the new administration and congressional leaders.
In addition to tax considerations, plan for the possibility of material interest rate increases. If large tax cuts are enacted along with the infrastructure proposal, many economists foresee an increased federal deficit. We do not attempt to predict the bond market’s ability to absorb additional federal borrowings and recommend you consult your financial advisors in regard to this possibility.
Following is a brief summary of proposals for the ACA, repatriation, infrastructure spending, carried interests and tax rate cuts for businesses and individuals. As always, we encourage you to contact your Baker Tilly advisor to discuss how these issues affect your tax position.
Affordable Care Act
As part of Trump’s 100-day action plan, he intends to propose legislation that repeals and replaces the ACA. Items in the replacement plan include:
- Health Savings Account usage
- Healthcare purchases across state lines
- State-managed Medicaid funds
- Accelerate FDA approval of drugs on waiting list by streamlining authorization process
The following items have also been mentioned as part of replacing the ACA:
- Continued pre-existing conditions protection
- The right to keep children under 26 on a parent’s insurance plan
- A tax deduction for insurance premium payments
Repealing the ACA could mean elimination of the net investment income tax, the Cadillac tax on high-end insurance plans as well as the medical device tax.
A 10 percent one-time tax on total un-repatriated overseas earnings of American companies is being proposed. Coupled with an annual tax (at the lowest U.S. minimum tax rate) on income earned overseas, this repatriation would be part of a “worldwide” tax system. Currently, this idea may have some bipartisan support if the repatriated funds are invested in the nation’s infrastructure. However, the House Republican tax plan uses repatriated funds to help pay for the reduction in corporate tax rates. At this time, American companies do not pay U.S. taxes on foreign-earned income until repatriated back to the U.S. As of now, there would be no restrictions on the company’s use of funds once back in the U.S.
The president-elect proposed $1 trillion of new infrastructure projects over 10 years that would rely heavily on private funding. These projects include updating highways, bridges, tunnels, power lines, airports, schools and hospitals. Financing would partly consist of $137 billion in new tax credits (subject to congressional approval) to attract private investment plus potentially use some of the repatriated funds. Trump may also consider using debt to finance infrastructure.
Carried interest is the portion of an investment funds’ returns that is paid to the fund manager. Presently, this income is generally taxed at the lower capital gains rates; under Trump’s plan, this income would be taxed at ordinary income rates.
The following chart summarizes Trump’s proposals for tax reform with respect to several key issues and compares them with current law. The proposed changes are from the president-elect’s website.
|Tax issue||2016 law||Trump’s proposals|
|Individual rates||Seven brackets of 10%, 15%, 25%, 28%, 33%, 35% and 39.6%; the top rate applies to taxable income over $415,051 for single filers and $466,951 for joint filers||Establishes three brackets of 12%, 25% and 33%; the top rate applies to taxable income over $112,500 for single filers and $225,000 for joint filers|
|Individual deductions||$6,300 standard deduction for single filers and $12,600 for joint filers; personal exemption is $4,050; limitation on itemized deductions begins with AGI over $259,400 for single filers, $311,300 for joint filers||$15,000 standard deduction for single filers and $30,000 for joint filers; personal exemption is eliminated; itemized deductions limited to $100,000 for single filers, $200,000 for joint filers|
|Capital gains and dividends||Three rates of 0%, 15% and 20%; the top rate applies to filers in the 39.6% income tax bracket; the 3.8% net investment income surtax applies to single filers with AGI over $200,000, $250,000 for joint filers||Maintains 2016 rates, but eliminates the net investment income surtax|
|Alternative minimum tax||Can apply to single filers with taxable income over $53,900, $83,800 for joint filers. Threshold for C corporations is $40,000||Repeals|
|Corporate rates||Eight brackets of 15%, 25%, 34%, 39%, 34%, 35%, 38% and 35%||15%|
|International||Corporate income is taxed worldwide, with the allowance of a foreign tax credit for taxes paid to foreign jurisdictions in which income is earned; tax on income earned overseas can be deferred if it is reinvested in ongoing foreign operations||Ends the deferral of overseas corporate income but preserves the foreign tax credit; enacts a deemed repatriation of foreign income at a 10% rate|
|Estate and gift tax||A maximum estate tax rate of 40% is imposed on taxable estates of $1 million or more, allows an exclusion of $5.45 million||Repeals the gift tax; replaces the estate tax by subjecting capital assets exceeding $10 million held at death to income tax at capital gain rates|
|Carried interest||Taxed at capital gains rates; the 3.8% net investment income surtax applies to single filers with AGI over $200,000, $250,000 for joint filers||Taxed at ordinary income rates|
The table below compares the federal tax liabilities of a joint filer using the 2016 federal income tax rates and the rates proposed by Trump (assuming all income is taxed at ordinary rates and taxable income remains constant). Note that the calculations using the 2016 rates do not consider the 3.8 percent net investment income tax or 0.9 percent Medicare tax imposed by the Affordable Care Act, which would be eliminated under Trump’s plan.
|Federal income tax||6,573||6,000||-8.7%|
|Federal income tax||57,913||54,750||-5.5%|
|Federal income tax||341,666||302,250||-11.5%|
If you expect rate reductions to be enacted in 2017, consider the following planning steps to defer income recognition until 2017, presumably at a lower tax rate. This assumes any rate reduction is retroactive to Jan. 1 rather than taking effect at the time of passage or in 2018.
- Defer income. Cash basis taxpayers may want to postpone billing clients until January
- Maximize contributions to 401(k)s and other pre-tax retirement accounts in 2016. If this means saving less in 2017 so the net savings between the two years is the same, the tax savings may be worth it.
- Postpone retirement account withdrawals. If you are retired and withdrawing money from a retirement plan and your cash flow permits, consider suspending any additional withdraws for 2016 and catching up in 2017.
- Accelerate state tax payments. If you have flexibility in when you can pay your real estate taxes, accelerate the payment — as well as state income tax payments — into 2016.
- Caution: Taking too many deductions in 2016 could trigger the alternative minimum tax and defeat the purpose of claiming the deduction in the first place. We recommend you meet with your tax advisor to run multiyear projections to determine the best strategy for your personal situation.
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.