Here is a summary of the April 26th rollout of Trump’s tax plan. He has proposed a pretty aggressive tax cut and reform package. It has similarities to some prior Republican tax proposals, but may be too costly for “hawkish” Republicans. The proposal was not in any technical or legislative form; it was simply rolled out on a one-page fact sheet by Treasury Secretary Steven Mnuchin and National Economic Council Director Gary Cohn. There are plenty of holes to fill in among the various provisions and there are likely to be more surprises in the future details. Mnuchin and Cohn indicated that White House officials would spend the month of May refining the plan with Congressional leadership and turn it into a legislative proposal later this summer. They are determined to get something done by the end of this year.
Business provisions: The plan continues Trump’s campaign pledge to lower the corporate rate down to 15 percent (from 35 percent). Interestingly, it also calls for making the 15 percent rate available to businesses organized as pass-throughs (LLCs, partnerships and S Corps). The administration acknowledged that there would need to be some anti-abuse rules to prevent business owners from converting wage income into business income.
Deemed repatriation: The proposal repeats a call Trump made during the campaign for a one-time deemed-repatriation tax on previously untaxed earnings held overseas. A specific rate for the one-time levy was not specified. However, Trump’s campaign proposal called for a rate of 10 percent.
Territorial tax system: Significantly, the plan also calls for a transition from a global tax system to a territorial system of taxation, meaning domestic multinational businesses would only be taxed on their income connected with the U.S. instead of worldwide income. Most other countries around the world have territorial tax systems and this would “even the playing field,” according to Mnuchin.
Individual provisions – lower rates, fewer incentives: On the individual side, the administration proposes to provide tax relief by compressing the seven income tax rate brackets under current law (ranging from 10 percent to 39.6 percent) to three brackets of 10, 25, and 35 percent. This is similar to what Trump proposed on the campaign trail in 2016, although that plan called for a bottom rate of 12 percent and a top rate of 33 percent. It did not specify income thresholds for the rate brackets, but indicated that this would be worked out with congressional leaders
Capital gains: Trump would repeal the 3.8 percent surtax on net investment income that was enacted under the Patient Protection and Affordable Care Act of 2010. The tax rate on capital gains would remain at 20 percent as under current law.
Standard deduction: The plan calls for increasing the standard deduction to $24,000 for joint filers and $12,000 for individuals. During the presidential campaign, Trump called for hiking the standard deduction to $30,000 for joint filers and $15,000 for individuals. This is designed to assist middle income families.
AMT: The plan also repeats proposals made during the presidential campaign to repeal the individual alternative minimum tax (AMT). This is necessary given the proposed new tax rates, or else our tax system would effectively become AMT (as it did when Bush enacted lower rates in 2001).
New incentives for child care expenses: The plan includes a proposal to provide tax relief to families facing child and dependent care expenses. Although no specifics were provided, Trump has previously offered a series of proposals that have included: an above-the line deduction for taxpayers facing certain child care and elder care expenses, a new tax-preferred savings account to encourage families to set aside funds for caregiving expenses, and expanded incentives for employers who offer on-site child care to their employees.
Many current incentives targeted for elimination: The administration also proposes to simplify the tax rules for individuals by eliminating “targeted tax breaks that mainly benefit the wealthiest taxpayers.” Although no details were provided, it was stated that the administration intends to review all current law tax incentives except for those tied to the mortgage interest deduction and charitable giving. An example given of such a provision was the deduction for state and local taxes. During the campaign, Trump also proposed to cap itemized deductions at $200,000 for joint filers and $100,000 for single filers.
Estate Tax Repeal: Trump restated his desire to repeal the estate tax. However, there was no indication whether it would be replaced with a capital gain tax, as he hinted during his campaign. There was also no mention of the future of the generation skipping tax.
What was not mentioned was how this tax cut and reform package would be paid for as part of the budget deficit. This should make for an interesting discussion with Congressional leadership of both parties. We’ll keep you updated as things progress over the summer (and probably fall).
Written by: John Schuman, JD, CFP®