Trump Tax Plan Revisited

May 11, 2017 | By Jon Powell, CFP®| Tax Efficiency

This article is based on information released in April of 2017 concerning the Trump Administrations plans for tax reform. For analysis concerning information released in September 2017, click HERE.

Back in December, we discussed what the Trump tax plan might look like based on proposals offered by the House Ways and Means Committee and published material from the Trump Campaign. At that time, both proposals had a number of similarities such as the consolidation of tax brackets and overall simplification of the tax code.

Recently, the Trump Administration unveiled their latest tax plan. So, does this fresh look at the administration’s goals for overhauling the tax code give us any further insight into what’s in store for the future of taxation? The short answer is: Not really. In fact, this new release is less detailed than the tax plans espoused during the 2016 Presidential Campaign.

Based on what has been released, I’ve compiled some updated thoughts on the Trump tax plan. Please note that based on the very limited details about these plans that are available, much of my analysis is inference.

Please take the below as no more than (hopefully apolitical) opinion on the information I have to draw conclusions from.

Tax Brackets & General Simplification

As promised before, the latest iteration of the tax plan maintains the stance of reducing the total number of marginal income tax brackets from seven to three. However, there is no indication of where these tax brackets will start and end.

Obviously, not knowing where the goal posts are make it impossible to determine the actual effect this will have on any individual’s tax situation.

In addition, the Alternative Minimum Tax (AMT) and “death tax” would be repealed to achieve further “simplification”. The elimination of these provisions would primarily represent tax breaks for the wealthy.

The AMT mainly applies to taxpayers with $200,000 to $500,000 of income and the estate tax is mostly a concern to decedents with estates in excess of $5 million.

Elimination of Most Deductions & Increasing the Standard Deduction

As with the 2016 plans, most deductions are being eliminated in favor of increasing the standard deduction. This is where talk such as the “your taxes can be done on a postcard” platitude comes from.

With a doubled standard deduction paired with the elimination of most other deductions, many who currently itemize a schedule A for their tax returns will no longer have reason to.

The Trump tax plan does highlight that it will be preserving the mortgage interest deduction and charitable contribution deductions from the chopping block.

The mortgage interest deduction is incredibly popular amongst the middle class. However, likely overlooked is without a state/local tax deduction to pair with a mortgage interest deduction, it is unlikely that this deduction would eclipse the beefed up standard deduction. Effectively, rendering it moot in a large percent of cases.

The Interesting Part (Really) – A 15% “Corporate” Tax Rate

However, there is one particular aspect of the trump tax plan that bears discussion. Toward the end of the document provided to press, there is a bullet noting: “15% business tax rate”.

It is unclear at this time whether this is meant to apply only to C-Corps (the entities we usually refer to when the topic of “Corporate Income Tax” is mentioned) or if it is intended to also apply to pass-through entities, such as S-Corps and LLCs. When pressed for clarification, Administration officials declined to give indication one way or the other.

If this tax rate is intended to apply to pass-through entities, it would effectively serve as a massive tax cut to many mid-to-small business owners and independent contractors.

Notably, this would also heavily benefit real estate developers (such as the Trump and Kushner business enterprises) as businesses like these are often incorporated as pass-through entities.

Additionally, this stipulation would likely upend much of how labor is structured in the US. Under this arrangement, it is plausible that an “employee” of a business would be subjected to higher tax rates than an independent contractor would be under the “corporate” tax rate.

On the surface, this would incentivize individuals to avoid “employment”. Instead, it would be beneficial to form corporate entities and bill for services as a contractor.

Now, I could speculate further on the ramifications of a change like this. In theory, this may erode labor protections, lead to retirement, Social Security, and Medicare funding issues, and make workers even more transient from job to job.

However, we’re purely in a territory of conjecture at this point. It’s unclear even what the Trump Administration intends by “15% corporate tax rate” so, theorizing on the secondary and tertiary effects of an uncertain hypothesis is a foolish endeavor.

Bottom Line – What Does This All Mean?

Well, right now… Not much. The details about this plan are currently too vague to draw conclusions from. On the surface, it would seem that the Trump tax plan would reduce total revenue to the federal government.

Officials in the administration seem to acknowledge this, but have only offered the explanation that “economic growth” will pay for the tax cuts in the long run. Right now we can only think in broad strokes.

We will likely have to wait for more concrete proposals from either the administration or Ways and Means committee before understanding the full ramifications of income tax overhaul.

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