Trump Administration Introduces Plan to Simplify Tax Code
By Mitchell Kopelman, partner-in-charge of Tax; Robert Steele, tax senior associate; Victoria Ferree, tax associate; Steven Gluck, tax associate; and Parker Rozelle, tax associate
With their tax briefing on April 26, 2017, the Trump administration moved forward with their proposed plan to simplify the tax code and cut tax rates across the board. While the briefing was not heavy on detail, Secretary of Treasury Steven Mnuchin and Director of the National Economic Council Gary Cohn delivered an address that contained a rough outline of their plan, highlighting the goals and objectives for the tax proposals. Below is a summary of the proposed tax changes broken out by individuals, corporations, flow-through activities and international matters.
The Trump administration has proposed tax cuts across all levels of income. Most notably, the highest tax rate would drop from 39.6 percent to 35 percent. There are many proposed adjustments for individual tax returns beyond a simple drop in rates. In support of simplifying the tax code, the current proposal includes the elimination of the Alternative Minimum Tax (AMT), which both increases the complexity of tax returns and the cost of compliance. Trump’s proposed tax reform plan eliminates all itemized deductions except for two – charitable donations and home mortgage interest. In addition to eliminating the remaining itemized deductions, Trump’s plan is to double the current standard deduction across all filing types and repeal the estate tax.
The two most common filing statuses are single and married-filing-jointly (MFJ). For tax year 2017, the standard deduction for a single-filing taxpayer is $6,350 and $12,700 for taxpayers filing as MFJ. A taxpayer either claims the standard deduction or can elect to itemize deductions. Although some of the currently-offered itemized deductions are limited to certain adjusted gross income (AGI) limitations and other various thresholds, having the option to itemize deductions incentivizes taxpayers to make investment decisions, such as purchasing a home or taking deductions for unreimbursed business expenses incurred throughout the year.
The Administration believes that by doubling the standard deduction, this may eliminate the need for filing Schedule A, which would simplify tax return preparation for many taxpayers. Essentially, by doubling the standard deduction, many taxpayers won’t surpass the new standard deduction and may be less incentivized to donate money to qualified charitable organizations or to purchase a home using a mortgage.
Consider a couple who wants to purchase a home with a $300,000 mortgage at a four percent interest rate. Their annual interest expense will be $12,000. Even if the couple donates $5,000 annually to charity, they will not need to itemize their deductions since they will automatically claim a $25,400 standard deduction.
Charitable organizations should consider whether the higher standard deduction will hamper their ability to raise money, since many donors may no longer receive a tax benefit for their contributions.
Home builders and mortgage lenders should consider whether the higher standard deduction removes the incentive for families to purchase homes. When families move from renting to owning, they often do a tax benefit analysis to compare rent paid versus after-tax benefit of the mortgage interest deduction.
Many investors could receive a positive result regarding their investments if the 3.8 percent net investment income tax gets repealed. The proposed repeal will result in less tax due on capital gains, interest and dividend income.
Many questions still remain about this tax plan. Though there was discussion about eliminating the estate tax, we wonder if this would apply to resident and non-resident individuals. Even more importantly, how will gifts between persons be taxed? Will there continue to be a gift tax regime? For AMT purposes, many individuals have been limited in their use of certain tax credits, like the R&D Credit. Will those now be available for use, or be permanently limited once AMT is eliminated?
Job creation and sustainability have been key issues for taxpayers all across the U.S. over the past few decades. President Trump has decided to solve this problem by changing how corporations are taxed, lowering the current top tax rate on corporations from 35 percent to 15 percent. Paying fewer taxes would allow companies to hire more people, invest in new businesses in the U.S., and expand existing U.S. operations. The Trump administration believes these factors will ultimately lead to the creation of more U.S. jobs and a thriving economy.
During the briefing, the repeal of AMT was mentioned. However, it was only mentioned in the case of individual taxpayers. It was unclear whether or not the current administration will eliminate the corporate AMT.
While it made a broad statement about lowering the business tax rate to 15 percent, the administration did not go into specifics regarding the taxation of flow-through entities. However, some details mentioned throughout the briefing will affect many clients’ flow-through activities. Investments in real estate have certain pass-through deductions which will no longer qualify as itemized deductions on an individual’s Schedule A, specifically property taxes paid as well as any state and local tax payments.
The administration commented in their briefing that they were concerned about some level of abuse individuals may use to receive business income via a flow-through entity to take advantage of the lower 15 percent rate corporations will be eligible for.
During the campaign, the Trump administration made reference to a 15 percent tax rate for income retained by a flow-through entity; however, this concept was not mentioned in the briefing.
We are pleased to hear the Trump administration did not bring up the ‘border adjustment tax’ as a way to offset any possible increased deficits brought on by the proposed tax plan. This concept would prevent businesses from deducting expenditures on imports while not recognizing revenue on exports.
The reduction of the corporate and, in some cases, flow-through tax rates to 15 percent would put the U.S. at an even lower corporate tax rate than the current rate of 19 percent in the UK. This lower tax rate could make the U.S. a popular destination for expansion and outsourcing from companies around the world. The Trump Administration believes this potential increase in companies coming to the U.S. would improve job creation and economic growth.
For international planning, we advise our clients to manage their outsourcing and offshore operations to defer and/or eliminate U.S. tax. However, by reducing the rate to 15 percent, domestic and foreign companies will have a much different perspective on long- and short-term tax planning. The most important question for international planning is whether the rates will remain at 15 percent. We look forward to helping our clients update their transfer pricing and global strategies as Trump’s tax proposal progresses.
While the Trump administration plans to move forward with a repatriation incentive plan, no rate or timeline has been suggested. Repatriation of the trillions of American profits located in foreign countries will be significant for U.S. companies and the economy by pumping in sizable funds to expand U.S. operations, mergers and acquisitions, and pay out dividends to shareholders.
While this is the initial proposal by the Trump administration, there is still a long way to go before the final tax legislation. Be on the lookout for more updates from Aprio as the legislation evolves.
Any tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or under any state or local tax law or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Please do not hesitate to contact us if you have any questions regarding the matter.