Howard, LLP

Howard Insights: President’s Tax Proposal

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Dallas, Texas, April 2017 – President Trump on April 26, 2017 offered a look into his proposal for tax reform.  Gary Cohn (Chief Economic Advisor) and Steven Mnuchin (Treasury Secretary) provided a summary of the plan; which includes:

Individual Tax Rates – Currently, there are 7 tax brackets starting at 10% and ending at a 39.6% top rate.  During his campaign, then candidate Trump’s plan was to lower the top rate to 33%.  President Trump’s plan announced a cut in the number of brackets from 7 to 3, with rates of 10%, 25%, and 35%.  It is not clear where the income cut offs will be for the brackets.

Corporate Tax Rates – The proposal is also looking to lower the top corporate rate from 35% to 15%.  If this rate makes it through and gets passed, it could be a time to reevaluate current business entity structures.  C Corporations have not been favorable in the past because of double taxation, but with a lower corporate rate it may make sense to transition to them.

Itemized Deductions – It is proposed that itemized deductions would be limited to mortgage interest and charitable contributions.  No more Real Estate Tax, Medical Expense or State Income tax deductions.  The proposal is silent on the investment interest expense deduction.  We assume that this deduction would not go away; it would likely no longer be an itemized deduction. We envision it being a deduction dollar for dollar (or something similar with limits) against the income earned from the investment.

Repatriation – Our tax system allows for corporations to leave profits overseas in foreign countries with lower than US tax rates through Foreign Domiciled Corporations.  This incentivizes the US Corp to leave the cash (profits) in those foreign jurisdictions.  At any point in time, if the US Corp brought those profits to the US (repatriation) they would owe tax on the profits at the corporation’s US rate.  The proposal would give a “one time free skip” for those corporations to repatriate to the US.  The corporations would still owe US tax, but the proposal is for a special rate to be applied to the repatriated profits.  The rate for this has not been announced; it appears that political wrangling is still going on in the background as to this item.  This is similar to a one time repatriation that George Bush’s Administration passed in 2004.

AMT and Net Investment Income Tax – Currently, our tax system is a combination of three separate taxes that individuals have to navigate through to get their final outcome.  There is a calculation under Regular Tax, then a computation via Alternative Minimum Tax, and then again another computation under the Net Investment Income Tax (also known as, Obamacare or 3.8%).  As you know running this gauntlet of three separate calculations does not usually help your bottom line tax number.  The proposal would eliminate the AMT & Net Investment Income Tax and go to a single tax system.

Estate Tax or “Death Tax” – The plan is to get rid of the estate tax all together.  This would eliminate the current 40% tax on estates of couples with a FMV over $11M.  This does not mean the heirs would get away with receiving assets with no tax hit.  It is more than likely the new “Estate Tax” be on the heir when they sell or dispose of the inherited assets.  Under current tax law, an heir would take assets with a basis equal to the FMV on date of death.  This gives the heir a stepped up basis in the asset.  With the estate tax gone, there would be no step up in basis.  The heir’s basis in the asset would be the same as the deceased under the proposal.

What is missing?

Tax on Pass-through Entities – During his campaign, then candidate Trump, had proposed a 15% tax on income retained in Pass-Through entities.  The proposal President Trump released did not include such a measure.

Comprehensive Tax Reform – It appears that this proposal will only be a temporary tax change (as much as 10 years).  There have been grumblings for several years about scrapping our 1986 tax code and doing a full permanent rewrite.  We do not see anything in this proposal that indicates that this would be a full rewrite of the code.

Capital Gains Rates – Currently the rates are 15% or 20% depending on your overall income level.  The proposal is silent to any changes to these rates.  It seems apparent these rates are to remain unchanged.

This is an ever evolving situation and more than likely, the meat of the proposal will come out early this summer.  If you have any questions or need assistance, we encourage you to contact the Howard team to discuss what options are available to you.