Bar News - February 15, 2017
Tax Law: Comparing Trumpís Tax Proposals with Current Law
By: Ashley L. Spina
President Donald Trump has proposed significant changes to the current tax regime by way of changing income tax rates for both individuals and businesses; taxing un-repatriated foreign earnings; and eliminating the Affordable Care Act tax, alternative minimum tax, and estate tax (hereinafter ďTrumpís ProposalĒ). Trump states that the goals of his tax plan are the following: 1) tax relief for the middle class; 2) simplify the tax code; 3) grow the American economy; and 4) no additional debt added to the deficit. Given Republican control of the House and Senate, some of Trumpís proposed changes could be implemented in 2017.
Changes to individual
income tax rates
The current progressive tax system has seven tax brackets, pushing the taxpayer into a higher tax bracket when certain income thresholds are exceeded. Trumpís Proposal will collapse the seven tax brackets into three (12 percent, 25 percent, and 33 percent). Additionally, the head-of-household filing category will be repealed, and unmarried taxpayers will instead be required to file as single.
While Trump would reduce the tax rate for the highest earners, his proposal would broaden the tax base by eliminating deductions. Trump proposes to cap itemized deductions at $100,000 for single filers and $200,000 for married taxpayers filing jointly, and eliminate the personal exemption amount. The current standard deduction for a single filer is $6,350, $12,700 for married filing jointly, and $9,350 for head-of-household. Trumpís Proposal will increase these amounts to $15,000 for a single filer and $30,000 for married taxpayers filing jointly.
While these amounts are more than double the current standard deduction, Trumpís Proposal would repeal the personal exemption amount of $4,050. Under the current tax system, a married couple with two children get a standard deduction of $12,700 and a personal exemption amount of $16,200 (4 x $4,050) for a total of $28,900 ($12,700 + $16,200). Under Trumpís Proposal, the same married couple with two children would receive a $30,000 exemption. Under the current system, a family with more than two children, and no child-care deductions, receives a standard deduction and personal exemption amount of $32,950 ($12,700 + $20,250). Under Trumpís Proposal, the same family would receive a standard deduction of $30,000.
In addition to changing the individual tax rates and standard deduction, Trumpís Proposal would offer an above-the-line deduction, up to $5,000 per child, for qualifying child-care expenses. The deduction would be available for up to four children. This amount would be capped by the stateís average cost of care, have income thresholds, and the deduction would not be available for households that do not owe any federal tax. Under the current tax system, a credit of up to 35 percent is available for qualifying child-care expenses of $3,000 for one child, and up to $6,000 for two or more. Trump would also provide a child-care savings account where families can contribute up to $2,000 annually and the government would match $1,000.
Accompanying this article is a chart comparing the current individual income tax rates and standard deduction to Trumpís Proposal. Single filers making between $112,500 and $191,650 would be impacted the most by being pushed into the 33 percent bracket from the current 28 percent.
Other significant changes include: 1) eliminating the estate tax, and imposing a capital gains tax instead, with an exemption amount of $10 million; 2) repealing the net investment income tax of 3.8 percent on income in excess of $200,000 for single filers and $250,000 for married filers; and 3) eliminating the alternative minimum tax.
Changes to business
income tax rates
Trumpís plan for corporate tax reform would lower tax rates for all businesses. The stated goals of reducing the corporate and business tax rate are to encourage capital investment, create jobs, and reduce inversions. Trumpís plan would reduce the corporate income tax rate from 35 percent to 15 percent and would eliminate the corporate alternative minimum tax.
The United States taxes the worldwide income of domestic companies when earnings are repatriated to the United States. Currently, a US company does not pay US income tax on its foreign earnings until the earnings are repatriated, or the company has subpart F income. It is estimated that US corporations have about $2.5 trillion in cash overseas. When foreign earnings are repatriated, a US company is subject to the US corporate tax rate of 35 percent. Generally, the Internal Revenue Code allows a credit against foreign taxes paid. Therefore, if a US company pays income tax in a foreign jurisdiction, the amount paid can be used to offset or reduce its US tax liability to prevent double taxation on the income.
Trumpís Proposal would impose a one-time 10 percent tax on all existing un-repatriated foreign income. The goal of the one-time tax is to encourage US corporations to bring back foreign cash, invest in American businesses and create jobs for the middle-class. A 10 percent tax on all foreign income could prove to be rather substantial for many companies, so the plan allows for a 10-year payment period. After the one-time 10 percent tax, all future income would be taxed annually as earned. With the proposed annual taxation of foreign earnings, it would effectively end the tax deferral system. To prevent double taxation on foreign earnings, Trumpís Proposal would leave in place the foreign tax credit so that income taxes paid in a foreign jurisdiction can be used to offset the companyís US tax liability.
There is disagreement on whether Trumpís Proposal can boost the economy, and whether it will pass in 2017 in its current form (or some variation) is anyoneís guess. However, the potential changes may provide tax professionals with planning opportunities that should be considered if the proposals gain any steam.
Ashley L. Spina is a tax attorney in RSM US in Boston. Her practice focuses on international taxation.