Potential tax changes under President Trump
by Walter Daskowski
In the wake of the November election, momentum is building for tax reform for corporations and individuals. President Trump’s vision is to reduce taxes across the board, especially for working and middle-income taxpayers. His plan also includes changing the corporate tax rate to keep jobs in America, create new business opportunities, and revitalize the economy generally.
Under the current law, tax on ordinary income is at graduated rates from 10% to 39.6%. But since the Affordable Care Act (ACA) was passed, those making over certain amounts pay an additional surtax, bringing the top federal rate to 43.5%.
The Trump plan will simplify the tax brackets from the current seven tiers down to just three (12%, 25%, and 33%). Under this proposal, the current three-tier capital gains tax structure, with 0%, 15%, and 20% rates, would remain in place and continue to apply to qualified dividends as well. The capital gains rates would correspond directly to the three individual income tax brackets.
So, those paying 12% ordinary income rates would pay 0% capital gains, those in the 25% bracket would pay the 15% capital gains rate, and those in the top 33% bracket would pay the 20% rate.
In addition, the ACA surtax on net investment income would be repealed, as well as the alternative minimum tax.
The Trump plan will also lower the business tax rate from 35% to 15% for C Corporations, and eliminate the corporate alternative minimum tax. Under the current law, S-corporations, partnerships, single member LLCs, sole-proprietorships, and LLCs treated as partnerships do not pay an entity-level tax; instead, income is allocated to the owners, who pay the corresponding tax at the individual level, based on applicable individual rates. Trump, however, would provide a unified business rate of 15%, meaning not only would C-corporations pay at that rate, but all business income—including income from S-corporations, partnerships (or LLCs) and all sole-proprietorships (or single-member LLCs)—will be subject to the same 15% rate. To put this into perspective, a taxpayer who earns all of his or her income from a self-employed sole proprietorship or through income earned in their partnership would experience a drop in top tax rate from 44.3% to 15% under the new presidency. This unified business tax rate may be the most significant part of the plan for individuals.
There has long been talk about a move to a simple and arguably fairer tax system, free of loopholes and special interests, and now seems to be that time. These proposals have a good chance of becoming policy, so individuals and their accountants should start talking about them now.
Weg & Carbonella CPA P.C.
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