Trump announced his updated tax plan last week, which seems
perfectly reasonable overambitious. Simply put, the goal is to slash taxes (both corporate and personal), but there’s no clear mention of how it all will be paid for. It’s like trying to put together a puzzle without having all the pieces – the picture on the outside of the box looks great, but we’re missing a lot of pieces to get us there.
We don’t yet have all the details, so that calls for a bit of speculation, but let’s work with what we’ve got and dive into the components of the new plan:
Personal Tax Rates
Key objective – Reduce the number of individual tax brackets down from seven to three (10%, 25%, 35%), effectively lowering the top bracket from 39.6% to 35%. This is different from Trump’s original tax plan proposed during the election, where he wanted to change the number of brackets from seven to four (0%, 10%, 20%, and 25%).
Missing piece of the puzzle – No income levels assigned to the new brackets.
Key objective – Double the standard deduction for all filers. Click here to see current standard deduction amounts.
Missing piece of the puzzle – Trump originally proposed getting rid of the Head of Household status, which has a higher standard deduction than “Single” filers. Is that still a part of Trump’s plan?
Key objective – Eliminate itemized deductions, except for mortgage interest and charitable contributions. That means if you have any significant medical expenses, have state & local tax payments (state & city withholdings, real estate taxes paid, etc.), have any unreimbursed employee expenses, home office deductions, or any other miscellaneous itemized deductions, you would no longer be able to deduct them.
This especially hurts residents of New York (specifically NYC), New Jersey, Connecticut, and California as these are among the highest taxed states.
Missing piece of the puzzle – In order to itemize your deductions under the current structure, your itemized deductions (mainly items listed in the above paragraph) must exceed your standard deduction.
If there are only two itemized deductions under this new plan, will the total of those deductions have to exceed the new, doubled standard deduction to get the benefit? Will it be added to the standard deduction? Will a percentage be allowed?
Alternative Minimum Tax (AMT)
Key objective – Repeal the AMT. The AMT is an additional tax on mainly the wealthy that basically says, “Hey, you make this much and reduced your taxable income based on your deductions, but we’re going to add those deductions back to your taxable income and tax you based on what we think you should pay.” I’m pretty sure that’s an exact quote from the Tax Code.
Click here to learn a little more about the AMT and see how much it cost Trump in 2005. Can you blame him for wanting to get rid of it?
Missing piece of the puzzle – This one is pretty cut and dry; consider this component of the plan a corner piece.
Net Investment Income Tax (NIIT)
Key objective – Eliminate the NIIT. The NIIT is the 3.8% surtax on investment income (interest, dividends, capital gains, pass-through income, etc.) put into place by Obamacare.
Missing piece of the puzzle – This is another straightforward component with (presumably) nothing missing; now we have two corners to our puzzle.
Corporate Tax Rate
Key objective – Cut the corporate tax rate down from 35% to 15%. This is probably the most aggressive proposal in the plan. Not only would this apply to corporations, but also to any pass-through business entities (partnerships, S Corps, LLCs, etc.) that are reported on the individual returns. There are some exceptions to this rule, but, again, they are not clear.
Missing piece of the puzzle – The rate cut on pass-through entities is limited to “small business”, but we don’t have a definition of what constitutes a “small business”.
Estate “Death” Tax
Key objective – Repeal the estate tax. The estate tax was nicknamed the death tax because it is a tax on the transfer of your assets at your death. This only applies to the wealthy, as your assets at the date of death must exceed a certain amount to be taxed. In 2017, the exclusion amount is $5.49 million. This is a no-brainer for Republicans and has been on the agenda for awhile.
Missing piece of the puzzle – Here, we have our third corner piece to our puzzle.
Child & Dependent Care
Key objective – Provide tax relief to (primarily middle class) families who pay for child and dependent care.
Missing piece of the puzzle – Literally everything. No details were given, at all.
One-Time Tax on Dollars Held Overseas
Key objective – Assess a one-time tax on the trillions of dollars held overseas. Trump would allow a one-time reduced rate for US companies to bring monies held in foreign countries back to the America. The United States would also cease taxing foreign income.
Missing piece of the puzzle – No one-time rate or one-time reduced rate was provided.
File on a Postcard
Key objective – Simplify the Tax Code enough to allow filing taxes on a “large postcard”, per Steven Mnuchin.
Missing piece of the puzzle – A simpler tax code and easier filing process do not always mean a more beneficial outcome. In order to be able to fit all activity on a “large postcard”, a lot of deductions and credits would have to be eliminated, possibly causing more of a tax for the taxpayer.
How Will All These Tax Cuts Be Paid For?
Key objective – Said tax cuts will produce economic growth of 3%, producing more income to be taxed. Also, deductions would be reduced and loopholes would be closed. Phew, thank goodness for this plan of action. I was starting to worry…
Missing piece of the puzzle – This part is the beautiful picture on the outside of the puzzle box that we all hope to achieve. The plan to pay for the tax cuts is so ambiguous and blindly optimistic that I don’t even know where to start. Economic growth hasn’t hit 3% since 2006; it was 1.6% in 2016. Which loopholes would be closed? Which deductions would be reduced?
So what are we left with? A plan that sounds good, albeit too good to be true, on paper, three corner pieces to the plan, and a whole lot of missing pieces. Hopefully, we hear more about the plan in the near future and pick up some more pieces on the way.
Key objective – Give you a concise, yet detailed summary of our fearless leader’s new tax plan.
Missing piece of the puzzle – Nothing. It was perfect. It was the best summary out there. Everybody will read this summary. All other summaries are fake news.
If you didn’t already, go back a reread that in your best Trump voice.
But seriously, if you feel anything was missing from this summary or if you want to chat about it some more, leave a comment below or get in touch with us!
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Nick Aiola is a CPA and the owner of Aiola CPA, PLLC. Nick and his team provide the highest quality of tax and advisory services to real estate investors and individuals and business owners in the real estate industry.
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