Some of you may remember my Article from February 2017 where I discussed potential elements of a future Trump tax plan. Well, here we are again. On September 27, 2017, President Trump’s administration published its tax reform plan, identified as the Tax Reform Framework (the “Tax Plan” for the remainder of this article). You can go straight to the source and review the Tax Plan for yourself by visiting https://www.treasury.gov/press-center/press-releases/Documents/Tax-Framework.pdf. Let’s review some of the key components.
Personal Income Taxes
We currently “enjoy” seven (7) tax brackets for personal ordinary income taxes in the current Internal Revenue Code (“IRC”). The Tax Plan would reduce the number of tax brackets to three (3). At one end of the spectrum, the current 10% tax bracket (for single tax payers) would be increased by 2% to 12%. On the other end of the spectrum, the 39.6% tax bracket would be reduced to 35%. The middle tax bracket would slide down from 28% to 25%. In addition, those in the lowest income tax bracket would enjoy a capital gains rate of 0%. Those in the middle tax bracket would have a capital gains rate of 15% (same as the current capital gains rate) and those in the top bracket would be subject to a 20% capital gains rate. As far as income stratification with regard to these brackets, please refer to the following chart:
INCOME LEVEL – SINGLE
INCOME LEVEL – JOINT
Lowest Tax Bracket
Middle Tax Bracket
Top Tax Bracket
These income levels are assumed for the purposes of this article to apply to the Tax Plan, as they are the same as those previously proposed by the GOP. However, President Trump has not specifically defined these income levels in his Tax Plan.
The Tax Plan jettisons itemized deductions; however, there are still itemized deductions allowed for mortgage interest (more on this in a moment) and charitable contributions. There is also an elimination of the deduction that we currently enjoy for state and local taxes. In the place of these lost deductions, the Tax Plan doubles the standard deduction for all taxpayers ($12,000 for single filers and $24,000 for married and joint filers).
With regard to the mortgage interest deduction; some critics of the Tax Plan are concerned that most tax payers will not be able to take advantage of the mortgage interest deduction and that its continued inclusion in the tax code only provides a benefit only to the wealthy. The Tax Plan may have the effect of marginalizing the use of the mortgage interest deduction as only homes worth $801,000 or more would qualify to receive the deduction. If this is the case, then there are obvious concerns that although the Tax Plan may provide a short-term increase in spending and boost the economy, the long-term effect could be drastically negative and push more of the middle-class tax payers towards renting versus home ownership.
Also, the Alternative Minimum Tax (‘AMT”) would be eliminated, along with the constant patching that Congress has been in the habit of exercising to maintain the broken AMT system.
Estate, Gift and GST Taxes
The Tax Plan states that it would repeal the federal estate, gift and generation skipping transfer tax. However, it does not provide any further detail on this topic. It is unclear as to whether the federal estate, gift and GST tax would be replaced by some other form of inheritance tax, or if possibly the government would dial back the unlimited step-up in cost basis at death to mitigate the revenue shortfall created by a blanket repeal of these aforementioned taxes. For the time-being, we are assuming that the status quo will be maintained for our planning purposes, until we are provided specific information otherwise.
The Tax Plan would reduce the highest corporate tax rate from 35% down to 20%. Small business, such as sole proprietorships, partnerships and S Corporations will have their maximum tax rate reduced to 25% under the Tax Plan. In addition, the Tax Plan provides a one-time tax holiday on past income earned overseas in order to encourage the repatriation of this income from its foreign locations, back to the U.S.
There is still a great deal that is unknown about the Tax Plan. The President has left large parts of it unfinished or punted it to be defined at a later date. In addition, this is still just a proposal. No law has been made with regard to this Tax Plan. It does not appear that the Tax Plan, as currently presented, would require most of our JGB clients to alter their estate plan to adjust for provisions of the Tax Plan. However, we shall continue to monitor the progress of this issue and report back as the Tax Plan either solidifies or fails in the political process.