The morning after Election Day 2016, Americans woke up to news that the Republican Party maintained majority seats in both houses of Congress, and Republican presidential candidate Donald Trump had defeated Democrat Hillary Clinton.
Donald Trump led a political campaign promising to reform immigration, global trade and federal taxation. Trump’s proposed tax reform plan crosses the entire Internal Revenue Code and taxation of the middle class, high net worth individuals and businesses. Now that the election is over, the focus of many Americans will be on whether Trump will get his proposed tax policy reform passed through the Republican-held Congress and how the proposed tax policy will affect them.
Trump’s tax plan would not only significantly reduce individual income tax rates, but would change deductions from and for adjusted gross income (AGI) commonly known by American taxpayers. In addition, Trump’s proposal contains unique provisions to help alleviate the high costs of child and eldercare. Under Trump’s tax policy reform:
Some of the most notable changes would occur in taxes which supplement the standard income tax and typically only affect high net worth individuals. Trump’s tax plan includes language regarding the Alternative Minimum Tax (AMT), Net Investment Income Tax (NIIT) and Estate Tax.
The AMT is a supplemental tax designed to ensure high income taxpayers pay a minimum amount of tax. The AMT is derived from applying a flat tax rate to an alternative taxable income calculation. The NIIT, on the other hand, is a 3.8% tax on interest, dividends and other investment income above statutory threshold amounts. The estate tax (often called the “death tax” in political arenas) is a 40% tax on amounts greater than $5.45 million in a deceased’s estate. Under Trump’s tax policy reform:
Perhaps the most drastic changes found in the reform plan involve business taxation. Currently, businesses are taxed as corporations or as pass-through entities. As a corporation, businesses pay an income tax at the entity-level. However, pass-through entities (including LLCs) are not taxed at the entity-level. Rather, profits and losses “flow-thru” to each owner and any income is subject to tax at each owner’s individual tax rate. Under Trump’s tax policy reform:
Current corporate and individual tax rates max out at 35% and 39.6%, respectively. This means the flat rate should appeal to corporate management and owners of profitable pass-through entities alike. Nevertheless, if all business income is subject to a single entity-level rate, the “flow-thru” advantage found in pass-through entities may be threatened.
Although comprehensive, Donald Trump’s tax plan is still subject to legislative revision in the coming months. It is important to remember, however, that the President does not have the authority to change or create tax laws. The constitutional authority to levy taxes is granted only to Congress, a Congress currently held by a Republican majority.
As tax changes and developments occur, we will continue to alert you.
Disclaimer: Any written tax content, comments, or advice contained in this article is limited to the matters specifically set forth herein. Such content, comments, or advice may be based on tax statutes, regulations, and administrative and judicial interpretations thereof and we have no obligation to update any content, comments or advice for retroactive or prospective changes to such authorities. This communication is not intended to address the potential application of penalties and interest, for which the taxpayer is responsible, that may be imposed for non-compliance with tax law.