The President-elect made a few campaign promises to us regarding taxes. And since the Republicans are controlling the House and the Senate, we are likely to see tax changes if his campaign plans and promises hold. These may not go into effect until the 2018 tax year. Since his campaign promises were without specificity, below is what we do know.
Trump has promised to repeal the estate tax, reduce corporate taxes to a flat 15% and simplify individual taxes. Trump has indicated he will first focus on changing business taxes before individual ones.
C-Corporations currently have a graduated tax rate to 35%, he is proposing that any business would be taxed at 15%. However, we do not know what expenses would still be allowed, and there is talk that Trump maybe moving toward a gross receipts tax, where very few expenses can be deducted. This would be good for some industries and not for others. It would discriminate against certain types of businesses – those that are very heavily expense-laden, like retail; they would pay more.
S-corporations and partnerships, which are pass-thru entities, presently are taxed on the individual level, but they would have the option to be taxed at the 15% corporate rate.
For individuals, Trump may take the top rate down by 6.6% to 33%, repealing the alternate minimum tax and reducing the number of tax brackets from seven today to three. Those with taxable income between $0 and $37,500 ($0 to $75,000 for married filers) would be subject to a 12% tax rate, while those with taxable income between $37,500 to $112,500 ($75,000 to $225,000 for married filers) would be subject to a 25% rate. And those with taxable income above $112,500 ($225,000+ for married filers) would be subject to a 33% federal tax rate. This may sound beneficial to some people, but there might be some negative surprising results as to what some people’s tax liability might be.
Trump may change the standard deduction and it would more than double to $15,000 for single filers to $30,000 for married couples filing jointly while eliminating many itemized deductions and capping all deductions at $100,000 for single individuals and $200,000 for married couples. This increase along with the lower tax brackets would see the federal tax liabilities go down for most Americans, and is in line with Trump’s goal to simply tax rules and present the rich from taking legally gray deductions. Charities may suffer if there’s a cap because this would not incentivize charitable deductions.
Under the Trump tax plan a middle class tax payer would likely see modest tax savings while those in the highest income ranges would actually see the most in savings given the lowering of the highest marginal tax rate, increase in the standard deduction and repeal of the Alternative Minimum Tax.
For those of us with businesses it would behoove us to consult with an up-to-date accountant regarding year-end tax planning.