Articles

The President Unveils Plans for Tax Reform by Barry M. Brant, CPA


Posted on April 27, 2017 by Barry Brant

The Trump administration yesterday introduced the key principles of what it is referring to as “the most significant tax reform since 1986” and “the biggest tax cuts in history.”  Central to the president’s plan are deep reductions in the corporate income tax rates and modest reductions in the individual income tax rates that are in line with his campaign promises.

As outlined yesterday, the president proposes to slash the top corporate tax rate to 15 percent from 35 percent and impose a new, one-time tax on the repatriation of previously untaxed overseas profits at a to-be-determined rate, which might be as low as 10 percent or even 3.5 percent, as proposed by certain congressional leaders. Furthermore, the proposal advocates for the U.S. to convert from the current system of taxation on worldwide profits to a territorial-tax system in which foreign profits are not taxed.

The 15 percent corporate rate would also apply to profits of pass-through businesses, such as S Corporations and LLCs, whose profits currently flow through to individual taxpayers and are taxed at a current rate as high as 39.6 percent. Like many of the points in the administration’s proposal, this one is unclear as to whether the 15 percent rate would apply to all of the taxable income of pass-through businesses or just the undistributed profits of such companies.

On the personal side of tax reform, the president calls for simplifying the number of tax brackets to three from seven, with a top individual income tax rate of 35 per cent, down from the current 39.6 percent. The additional tax rates under the president’s plan will be 10 percent and 25 percent, although the income brackets for these levels have not yet been defined. Long-term capital gains and dividends are expected to continue to be taxed at a maximum rate of 20%.

In addition, the president’s proposal aims to repeal the burdensome Alternative Minimum Tax as well as the estate tax and the 3.8 percent Medicare tax on Net Investment Income. Furthermore, tax deductions for charitable contributions, mortgage interest and retirement savings will remain intact, but other itemized deductions, including the deduction for state and local taxes, will be eliminated. Additionally, the administration proposes a doubling of the standard deduction from approximately $12,000 to $24,000 for married couples filing jointly and from $6,000 to $12,000 for single filers.

The one-page statement released by the White House lacked details, but it noticeably did not mention a repeal of Section 1031 tax-deferred exchanges (principally used for real estate) or the favorable treatment of carried interests.. It also did not mention previous Trump concepts such as the expensing of fixed asset acquisitions or the non-deducibility of interest expense on business debts.

Speaker of the House Paul Ryan and House Ways and Means Committee Chairman Kevin Brady stated that the House is 80 percent in agreement with the president’s plan. However, questions remain regarding how much opposition the president will receive from congressional lawmakers who have their own visions of tax reform.  For example, under a House plan, the corporate tax rate would be set at 20 percent and there would be a “border adjustment tax” of 20 percent on imports. Similarly, questions remain as to how the president intends to pay for his plan and offset tax cuts without ballooning the national deficit. How and when these details will be hammered out is unclear.

There is no doubt that the U.S. is ripe for tax reform. The professionals at Berkowitz Pollack Brant will keep you abreast of tax reform as it develops, so that we may assist you with your short and long-term tax and financial planning needs.

About the Author: Barry M. Brant, CPA, is director of Tax, Consulting and International Services with Berkowitz Pollack Brant, where he leads the firm’s private client group and provides guidance on complex tax matters, including multi-national holdings, cross-border treaties and wealth preservation and protection.  He can be reached in the CPA firm’s Miami office at 305-379-7000, or via email at info@bpbcpa.com.