One thing to be be thankful for this holiday season is that the tax 'policies' of President Elect Trump (PET) and our Republican friends in the 115th congress will keep tax accounts and bookkeepers gainfully employed well into the foreseeable future. In fact I am adding staff again, which 'sounds' great!
Is is good for the US though - from a wonky economic perspective - that tax practitioners are expected to be in high demand well into the foreseeable future? Perhaps, perhaps not.
IMHO while the Republican sweep may tip the scales on some year-end decisions about deferring income and/or accelerating deductions there remain many uncertainties to consider, such as whether:
- Next year's changes will be retroactive to January 1 or even apply in 2017.
- Income tax rate reductions will be phased in, as they were in 2001 when the top rate only went from 39.6 percent to 39.1 percent and eventually 35%.
- Changes will come in the form of targeted legislation along the lines of the Economic Growth and Tax Relief Reconciliation Act of 2001, or a comprehensive tax reform package more akin to the Tax Reform Act of 1986
So while factoring likely 2017 changes into year-end decisions makes sense, it's important not to weight them too terribly much as there is now a good chance that the 115th Congress will pursue broad tax reform.
Many of America's Tax Experts have been called upon to speculate what will happen with tax legislation in the coming months of a new administration now that Republicans will be responsible for all our woes. I too was most recently quoted in Inside Sources about my opinions of our 45th President's tax plan.
Soak that up for a minute...
Our young country is only on its 45 president!
Either way - Ready yourself for the pendulum to swing back with a vengeance.
Both PET and congressional republicans have put in writing their respective tax proposals, both of which would affect the U.S. federal taxation of individuals and businesses both domestically and internationally.
Ordinarily what is expected to happen next is the Treasury Department should release in early 2017 the new administration’s tax proposals in what is referred to as the Green Book. My guess is the 115th congress will immediately ignore this report and instead introduce a bill embodying comprehensive tax reform proposals.
How the Trump proposals and the Congressional Republican proposals come together is a matter of Washington power politics. The following is where the two 'sides' are starting.
Trump's 'proposals' require further elaboration as they:
- Reduce the top marginal rate on individuals to 33% on income over $225,000 for married couples filing jointly ($112,500 for single filers).
- Repeal of both the current 3.8% tax on “net investment income” and the individual alternative minimum tax.
- Preserve the existing maximum rate of 20% on capital gains.
- State that “Carried interest will be taxed as ordinary income” without elaboration.
- Tax income earned through flow-through entities (such as partnerships and subchapter S corporations) and reinvested in the business at the top corporate tax rate of 15%, rather than the 33% rate
- Simplify deductions for individuals, raising the standard deduction but eliminating personal exemptions, and capping itemized deductions at $200,000 for married couples filing jointly ($100,000 for single filers). Under current law these deductions include state and local income, real estate and certain other taxes paid; mortgage and investment interest: medical expenses subject to a floor; charitable contributions; casualty and theft losses; unreimbursed employee expenses; and miscellaneous other deductions subject to a floor.
- Repeal the estate tax, but provide that “capital gains held until death and valued over $10 million will be subject to tax”
- Contain a variety of proposals for individuals relating to child and dependent care which are likely to be of substantial interest to lower-income taxpayers.
- Lower the top marginal corporate income tax rate from 35% to 15%, limited to retained (rather than distributed) earnings.
- Eliminate corporate Alternative Minimum Tax - AMT.
- Provide for a “deemed” repatriation of corporate profits held outside the U.S., taxed at 10% one time.
- Eliminate most “corporate tax expenditures” except for the existing research and development (“R&D”) credit.
- Allow an election for domestic manufacturers to expense current capital investment broadly in exchange for forgoing the corporate interest expense deduction (which presumably would be available otherwise).
- Encourage spending by businesses in support of childcare for employees.
The House Republicans Tax Reform Task Force, led by Rep. Brady (R-TX) and Speaker Ryan, released The Tax Reform Task Force Blue Print Tax Plan containing a wide variety of tax reform proposals. They:
- Restructure the IRS - A better idea is to properly fund the agency.
- Reduce the top marginal income tax rate for individuals to 33%, but instead of maintaining the current capital gains rate system, “investment income” (defined to include capital gains, dividends and interest income) would be taxed at 50% of the otherwise applicable rate – effectively lowering the top marginal tax rate on capital gains, dividends and interest to 16.5%.
- Create a simpler set of deductions, eliminating personal exemptions and the AMT, and modifying credits and deductions for child and dependent care.
- Preserve and simplifies educational tax benefits.
- Eliminate most itemized deductions, exemptions and credits for individuals, including the deduction for state and local taxes, but would allow the mortgage interest deduction and charitable contribution deduction to be claimed in lieu of the standard deduction.
- Reform and simplify retirement savings plans authorized under current law (IRAs, Roth IRAs, 401(k)'s, etc)
- Repeal of the estate and generation-skipping transfer-taxes, apparently without exception (and without requiring the taxation of any amount of capital gains on appreciated assets held at death).
- Reduce income on “small businesses” to a top marginal tax rate of 25%, rather than the 33% rate otherwise applicable to ordinary income. However, “owner-operators” of sole proprietorship operation and pass-through businesses must be paid, or will be deemed to have been paid, “reasonable compensation” by the business. Such compensation would be taxable to the individual at full ordinary rates – i.e., to a maximum of 33% – and would be deductible at the entity level, as it would be under current law.
- Cut the top corporate tax rate to 20%.
- Eliminate the corporate Alternative Minimum Tax - AMT.
- Allow full, current-year expense claims for new investments in tangible and intangible property including intellectual property. The House Blueprint is presently silent on acquired goodwill.
- Limit the deductibility of interest expense incurred in a trade or business to the extent of current year taxable interest income, with any remaining interest expense (“net interest expense”) being eligible for an indefinite carry forward. Special rules would be developed for banks, insurance companies and leasing companies, as interest income and expense is inherent to these businesses.
- Reform Net operating losses (“NOLs”) to allow indefinite carry forwards with an inflation adjustment factor applied with no carry backs in any regards. The use of carry forward NOLs in any given taxable year would be limited to 90% of the “net taxable amount” for the year without regard to the carry forward. In other words the carry forward NOLs could not offset more than 90% of a corporation’s taxable income in any given year.
- Eliminate all other deductions and credits for corporations other than the R&D credit (also preserved in PET’s Plan). The House Blueprint presently would reform the R&D credit.
- Propose a “destination-basis” tax system under which the United States would tax only products consumed in the United States (rather than products produced in the United States) and a territorial tax system under which income earned abroad would be exempt from tax (replacing the current U.S. system of worldwide income taxation).
- Provide for repeal of current controlled foreign corporation rules governing foreign based company sales income and foreign base company services income as unnecessary in a destination-basis system. To prevent abuse however the plan would retain the foreign personal holding company income rules covering various categories of passive income such as interest and certain real property and royalty income.
- Provide for a deemed repatriation of existing offshore earnings taxable at 8.75% on earnings held in cash or cash equivalents, and 3.5% on all other earnings. This tax would be payable over an eight-year period.
While both plans represent the most recent proposals by those who will be in control of the legislative process next January it seems highly likely that additional proposals will be introduced in the legislative process.
How does all of this impact your year-end tax planning?
When the 115th Congress convenes in January 2017 compromise will likely be needed to bring on board both GOP fiscal conservatives who will want revenue offsets to pay for tax reduction, and Senate Democrats who have the filibuster rule to prevent passage of tax bills with fewer than 60 votes.
Beyond considering tax proposals one tax bill at a time, it remains to be seen whether proposals can be packaged within a broader mandate for “tax reform” and “tax simplification.”
As the world turns, so are the days of our lives. With a Republican government seated for the first time in a decade, 2017 will bring numerous tax changes. Among the most likely to pass and the most important are:
- Across the board reductions in individual income tax rates.
- Reduction in the top corporate income tax rate.
- Repeal of healthcare taxes and credits enacted under the Affordable Care Act (Obamacare).
- Repeal of the estate tax.
A key aspect to look for will be the repeal of a group of taxes that are integral to the healthcare law including:
- the 3.8 percent Net Investment Income Tax (NIIT);
- the .9 percent additional Medicare tax;
- the penalties associated with the individual and employer mandates;
- the tax on "Cadillac" healthcare plans; and
- the excise tax on medical devices.
It is obvious to me that dismantling Obamacare may prove MUCH more difficult than anyone imagined mainly because the health care law has grown to provide more than 20 million Americans with health coverage, 12 million through the health insurance exchanges, and 8 million through Medicaid expansion, and that keeping just the popular parts like requiring insurance companies to cover preexisting conditions is impractical.
Given the challenges of the "replace" part of "repeal and replace", there seems to be an emerging consensus that there will have to be a transitional period, perhaps running through 2017, during which premium subsidies, federally funded Medicaid expansion, healthcare market reforms, and other aspects of Obamacare will continue.
If so, it raises the question of whether Congress would repeal the taxes that pay for the program while the federal government continues to incur its cost.
That aside, it's fairly likely that Congress will eliminate several itemized deductions to help pay for the proposals common to both the Trump Plan and the Tax Reform Task Force Blue Print Tax Plan aka the "Ryan/Brady" plan. Say goodbye to Schedule A as you've grown to know it!