With the 2016 presidential election behind us I thought it would be a good idea to address the sudden 800lb gorilla in the room; Trump’s tax plan. Trump has released an aggressive tax plan that his administration believes will stimulate economic growth in the United States. Although the question remains whether part, or all, of the proposed changes will be passed into law, it’s best to be prepared and understand the consequences.
Given the number of changes in the proposal, I am only highlighting those that could have an impact on the average taxpayer and business owner.
This article is a good read but it does get a bit technical at points so brace yourself.
Individuals
Tax Bracket Changes
There are currently seven income tax brackets starting at 10% and topping out at 39.6%. Trump’s plan condenses those seven brackets into three; 10%, 20%, and 25%.
Deductions & Personal Exemptions
Trump’s plan would increase the standard deduction from $6,300 to $15,000 for single filers and from $12,600 to $30,000 for joint filers. This would result in fewer taxpayers itemizing their deductions. For those able to itemize, single filers would be capped at $100,000 in itemized deductions and joint filers would be capped at $200,000. An allowance for personal exemptions and the head-of-household filing status would also be eliminated as a result of the plan.
Childcare
Under Trump’s plan, taxpayers would be entitled to an above-the-line deduction for children under the age of 13 for childcare expenses, but the proposed deduction would be capped at the state average for the age of each child. For example, if a taxpayer lived in GA and the average cost for childcare were determined to be $4,000 for a 10-year-old child in GA, a taxpayer with a 10-year-old child would be entitled to a deduction up to that amount. Any excess costs would presumably not be deductible. The childcare exclusion would not be available to single filers with total income over $250,000 or joint filers with total income over $500,000, and would be limited to four children per taxpayer per year. Additionally, any deduction for an eldercare dependent would be capped at $5,000 per year.
Something interesting to note is that this proposal would also be provided to taxpayers who use stay-at-home parents or grandparents as caregivers (as well as those who use paid caregivers).
Businesses
Tax Rate
Under President-elect Trump’s plan, the current corporate tax rate of 35% would be reduced to 15%, and the corporate alternative minimum tax rate would be eliminated. As a result, most business deductions would be eliminated. This rate would become available to all businesses, regardless of size, primarily to encourage them to retain profits within their business (and in theory stimulate more spending within the business).
Perhaps the biggest change to corporate tax rates would be for LLCs, partnerships, and S corporations, commonly known as “pass-through” entities. The proposal would make the pass-through portion of income taxable at the new corporate rate of 15% as well. This could have a huge impact on business owners depending on their income bracket.
Depreciation
There has been some discussion in the tax community about Trump’s proposal to eliminate depreciation, but I’m skeptical. Such a revolutionary change to a long-standing accounting principle seems unlikely. There is, however, a proposal in his plan, which would allow manufacturing firms to expense capital investments entirely in the year of purchase, but at the same time forgoing a deduction for interest expense on the same asset(s). Essentially, you would not be able to finance an asset, deduct the entire asset in the year of purchase, and continue to receive an interest expense deduction for the same asset.
How things shake out on the subject of depreciation will be interesting for sure.
On-site Childcare
If your business offers on-site childcare then you are aware of the tax credit that currently provides your business up to $150,000 for a portion of the costs associated with providing the childcare. Trump’s proposal would raise this credit to $500,000. Amounts paid to employees for childcare would still be considered business deductions, but would not be used to calculate this credit.
Concluding Remarks
I hope readers have found this article insightful. Tax changes are never easy to navigate or understand but my goal was to make readers aware of some of the changes that could potentially be coming to us in the near future. There will undoubtedly be tax changes, which will have an impact on individuals and businesses beginning in 2017.
Confused? Concerned? Unsure? Feel free to comment below or send me a message to keep the conversation going.