How Will the 2016 Presidential Election Impact Taxpayers?
The 2016 election is now behind us. With the Republicans controlling not only Congress, but the White House as well, many changes are being forecast for 2017. One area that could see sweeping change is tax law. While there is uncertainty surrounding what form these modifications to tax law might eventually take, the following proposals were part of President-elect Trump’s campaign materials.
Changes Affecting Individual Taxpayers
- Currently, there are seven individual income tax brackets, ranging from 10% to 39.6%. Trump’s proposal would condense the number of tax brackets from seven to three. The tax rates would range from 12% to 33%.
- Under Trump’s proposal, the standard deduction would increase to $15,000 for single taxpayers and $30,000 for married couples filing jointly.
- Itemized deductions would be capped at $100,000 for single taxpayers and $200,000 for married couples filing jointly under Trump’s proposal.
- Personal exemptions would be eliminated under Trump’s proposal.
- Trump’s proposal would eliminate the head of household filing status.
- Capital gains are currently taxed at either 15% or 20%, depending on adjusted gross income. There is no proposed change to this current structure.
- The alternative minimum tax would be repealed under Trump’s proposal.
- Passive income is currently taxed at 3.8% once a taxpayer’s adjusted gross income reaches a specific limit. Trump’s proposal would repeal this tax as part of the overall repeal of the Affordable Care Act.
- The federal estate and gift tax would be repealed. This proposal may also include a change to the basis “step-up” rules that are currently in the law.
- Taxpayers can currently receive a limited credit for qualifying childcare and eldercare expenses. Trump is instead proposing an “above-the-line” deduction for qualifying childcare and eldercare expenses, up to certain income thresholds.
- Carried interest is currently taxed at capital gain tax rates. Trump has proposed to tax carried interest at ordinary income rates.
Changes Affecting All Taxpayers
- Trump’s proposal would repeal most, if not all of the provisions, of the Affordable Care Act. This includes the net investment income tax, the “Cadillac” tax, and the medical devices tax.
Changes Affecting Business Taxpayers
- The current top tax rate for corporations is 35%. Trump proposes to lower this rate to 15%.
- The corporate alternative minimum tax would be repealed under Trump’s proposal.
- Pass-through entities – for this purpose defined as sole proprietorships, S corporations and partnerships – are currently taxed using the individual tax rates. Trump’s proposal would allow pass-through entities to be taxed at the 15% corporate tax rate for all income retained in the business. There would be a second layer of tax added for amounts that are distributed out of the business. Consideration is also given to putting rules in place that would prevent business owners from converting compensation, which would be taxed at individual rates, to income retained by the business, which would be taxed at the 15% rate.
- In exchange for lowering the business income tax rate, certain unspecified corporate tax deductions would be eliminated. It should be noted the Research and Development Credit will be retained.
- For 2016, Section 179 expensing is $500,000. Trump’s proposal would raise this expensing amount to $1 million.
- For manufacturers, Trump’s proposal would allow an immediate deduction for all new investments in the business. However, such manufacturers would have to forgo deducting interest expense.
- For businesses that offer on-site childcare, the annual cap on the business credit for the on-site childcare would be increased under Trump’s proposal.
- For corporations that hold corporate profits offshore, Trump’s proposal would allow a “one-time” deemed repatriation of those profits at a reduced tax rate.
As with most proposals to change the tax law, uncertainties do exist in planning for how these proposals will affect your particular tax situation. Furthermore, it is unknown the extent to which the above proposals will actually become law. Contact your KSM advisor regarding tax planning in such uncertain times.
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