Trump’s Tax Plan

Is the Trump tax plan a done deal?

Or just the beginning of negotiations?

Now that Donald Trump has been elected President, many people are speculating on the impact the Trump tax plan will have on personal and business taxes. Since the new President is backed by a Republican-majority Congress, many want to know if this tax plan is a done deal.

Let’s take a look at how the Trump plan could impact the personal and business finances of business owners and whether it’s likely to be passed quickly “as-is” or if it could change during an extended negotiation and approval process.

How taxes work

Let’s start by looking at how taxes are proposed, negotiated and put into effect. Many people believe that the government budgeting process is a simple one: Dollars come in from taxes and they’re spent by the government to provide services such as infrastructure development, national defense and social services.

However, the reality is much more complex. The government often uses taxation as a way to control the economy (an objective of the Trump plan). It sometimes cuts specific types of taxes among certain segments of the tax base to pump money into designated sectors of the economy to stimulate growth. Conversely, the government may increase certain taxes to slow an economy that’s expanding too rapidly or to reduce asset bubbles.

At the foundation of all this spreadsheet and economic complexity is a congressional budget mandate that any tax cut must be offset with a corresponding reduction in spending. A lot of back-and-forth negotiation and deal-making takes place before a tax proposal becomes law:

  1. A new tax plan can be recommended by the President, members of Congress or as part of a broader budget or spending proposal.
  2. In order for a plan to move forward, a tax bill is initiated by the House of Representatives and reviewed and debated by members of its Ways and Means Committee. When members of this committee reach agreement on the bill, they translate it into a law.
  3. The law goes from the Ways and Means Committee to the full House, where it is debated, possibly amended, and eventually approved.
  4. Next it moves to the Senate, where it is reviewed by its Finance Committee. There is a good chance that it could be revised or rewritten. The committee’s version is then presented to the full Senate.
  5. Once the Senate approves the tax legislation, it is sent to a joint committee made up of members of the House and Senate. They go through a negotiation process to arrive at a compromise version of the new tax law.
  6. The compromise version goes to both the House and the Senate for approval.
  7. Once the tax legislation is passed by Congress, it goes to the White House, where the president can either sign it into law or veto it.
  8. If the president decides to veto it, Congress may attempt to override the veto. This takes a two-thirds vote of each house, which is difficult to achieve during partisan political periods.

Clearly, getting tax legislation passed is a difficult and time-consuming process.

The Trump plan: Personal taxes

At the foundation of the Trump tax plan is a proposal to simplify the personal income tax code by reducing the number of tax brackets. This change in personal income taxes may have a significant impact on business owners. It could increase the amount of money they have available to invest in their businesses. The following tables illustrate how this simplification process could play out:

Current tax brackets:

Tax bracket Filing single Head of household Married filing jointly
10 percent $0-$9,275 $0-$13,250 $0-$18,550
15 percent $9,275-$37,650 $13,250-$50,400 $18,550-$75,300
25 percent $37,650-$91,150 $50,400-$130,150 $75,300-$151,900
28 percent $91,150-$190,150 $130,150-$210,800 $151,900-$231,450
33 percent $190,150-$413,350 $130,150-$210,800 $231,450-$413,350
35 percent $413,350-$415,050 $413,350-$441,000 $413,350-$466,950
39.6 percent $415,050+ $441,000+ $466,950+

Proposed tax brackets:

Tax bracket Filing single Head of household Married filing jointly
12 percent $0-$37,500 Same as single filer $0-$75,000
25 percent $37,500-$112,500 Same as single filer $75,000-$225,000
33 percent $112,500+ Same as single filer $225,000+

Source: Tax Policy Center

Based on an analysis on the Trump tax plan, coupled with the simplification process, personal income taxes would be reduced, on average, by approximately two percent. The top 0.1 percent of earners would receive a roughly seven percent tax reduction while those in the lowest brackets would receive a less than one percent cut.

This table provides a breakdown of how the reductions could impact people at different income levels:

Income percentile Current tax rate Proposed tax rate Reduction
Bottom 20 percent 2.3 percent 1.7 percent -0.6 percent
Second 20 percent 15.6 percent 14.9 percent -0.7 percent
Middle 20 percent 19.2 percent 17.5 percent -1.7 percent
Fourth 20 percent 20.1 percent 18.5 percent -1.6 percent
Top 20 percent 31.1 percent 27.9 percent -3.2 percent
Top 1 percent 38.8 percent 32.3 percent -6.5 percent
Top 0.1 percent 39.5 percent 32.2 percent -7.3 percent

Source: Tax Policy Center

According to tax policy experts, certain groups could expect their taxes to increase under the Trump plan:

  • Single parents earning $75,000 per year who have two school-age children and no child care costs could expect to pay approximately $2,400 more in taxes.
  • Single parents earning $50,000 per year with three school-age children and no child care costs would see their taxes go up by almost $1,200.
  • A married couple earning $50,000, with two school-age children and no child care costs could experience a tax increase of about $150.

The tax increase results from the fact that the Trump plan eliminates the $4,000 exemption for each person in a household.

Other groups, especially those dependent on professional child care, could see their taxes reduced:

  • A married couple that earns $50,000 per year with two children and pays $8,000 in child care expenses would experience a 35 percent reduction in taxes.
  • A married couple earning $75,000 annually with two children that has $10,000 in child care expenses would enjoy a 30 percent tax cut.
  • A married couple that brings in $5 million a year with two children and $12,000 in child care expenses would see a three percent cut.

One other benefit to business owners and other high-net-worth individuals that’s included in the Trump plan: It would completely eliminate the estate tax, which is currently only paid by the top one percent of taxpayers.

The Trump plan: Business taxes

As it currently stands, the Trump tax plan will reduce the business tax rate from 35 percent to 15 percent. At the same time, it will eliminate the corporate alternative minimum tax. According to the Trump campaign website, the reduced tax rate will be available to both large and small businesses across the United States.

The plan also provides for a repatriation of corporate profits held offshore at a one-time tax rate of 10 percent. This is designed to move offshore assets back into the United States.

In addition, the Trump business tax plan eliminates most corporate tax deductions and credits, except for the Research and Development credit. Also, companies doing any type of manufacturing (broadly defined) in the United States may choose to expense capital investment and lose the opportunity to deduct corporate interest expense. A business that decides to do this can change the decision within three years. If the decision is reversed, prior year tax returns would need to be updated based on the new status. After three years, the decision is final and can’t be changed.

Similar to the Trump personal tax plan, the business proposal is supportive of families who are dependent on professional childcare. The annual cap for the business tax credit for on-site childcare would increase to $500,000 per year, up from $150,000. The recapture period would be lowered to five years from ten.In addition, under the plan, businesses that contribute to paying an employee’s childcare expenses can exclude these contributions from income.

What to expect

It’s hard to predict which portions of the Trump tax plan will be approved by Congress and when it would take effect. The plan (which is still lacking significant details) must be fleshed out and go through the approval process outlined above. By comparison, the Bush tax cuts took approximately two years to be approved by Congress, and they were based on more research and a completely developed plan.

With all the uncertainty surrounding the Trump plan, it seems unlikely that the Trump tax proposal will be passed quickly or in its current form. We’ll continue to provide you with information on the progress of this proposal and steps you can take to plan for personal and business tax changes ahead.

As always, feel free to contact us any time you have questions about your tax situation today or in the future.

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