Tax Policy and Trump – What To Expect Now
By Brian Furman and Craig Wickwire, RSM
Some of us awoke to an unexpected outcome of the U.S. Presidential election – what many political pundits would call an upset. As you can imagine, the unexpected outcome is now providing opportunities for tax planning, quite unlike anything we’ve considered previously. President-Elect Trump’s tax proposals as compared to the GOP proposals (“Blueprint”) aren’t measurably different, as we will explain below, but there are still many unanswered questions. However, we do know that Speaker of the House, Paul Ryan, has personally committed to substantial donors that tax reform will be enacted in 2017.
First 100 Days
We expect the 115th Congress to enact two budget bills during 2017. The first will be to repeal the 2009 Affordable Care Act and to wrap up any leftover business from the 114th Congress. The second budget bill will focus on comprehensive tax reform, but is not expected to be passed until late summer 2017.
Effect on Individual Taxpayers
As with all tax reform, both the President-Elect’s and House Republican’s plans are aimed at “simplifying” the tax code. However, if history is any indication, the tax code is rarely ever simplified. There are some common themes behind both plans, such as reducing marginal tax rates while broadening the tax base. For individuals, this involves either eliminating certain itemized deductions such as state and local taxes, the medical expense deduction and miscellaneous deductions [House Republicans] or enacting a hard cap on itemized deductions at $200,000 / $100,000 for Married Filing Jointly and Single taxpayers, respectively [Trump]. Some other items worthy of note are the proposed elimination of the 3.8% net investment income tax, Alternative Minimum Tax (AMT) and estate tax.
Effect on Entity Taxpayers
With roughly 95% of entities operated as pass-through entities, business taxes have become a prime target for tax reform. It is likely that we could actually see an entity-level tax imposed upon pass-through entities. For instance, President Elect Trump’s proposal calls for a 15% entity-level tax on pass-through entities as well as a “dividend” tax on large pass-throughs. The House Republican’s plan calls for a 25% tax on the remainder of income after “reasonable compensation” has been taken. This, coupled with new Internal Revenue Service audit regulations related to pass-through entities, could result in much higher overhead and compliance costs for these historically lean organizations.
While it seems there is an unfavorable landscape ahead for pass-through entities, the future is brighter for corporate entities. Under both plans the corporate tax rate is proposed to be slashed to between 15% and 20%.
How are these tax cuts being paid for?
The President-Elect not only wants to reduce the amount of tax revenue being collected, but also wants to begin large spending projects on infrastructure on a level that hasn’t been seen since the New Deal. Yes, that’s right, not since the 1930s! This infrastructure investment won’t only focus on roads, bridges, ports and canals, but will be much more broad and modern including sewage, water, broadband internet, cybersecurity and hardening the energy infrastructure.
The crux of any major piece of legislation is how it’s going to be paid for. In this case, the major target is attracting the $2.6 trillion in corporate profits being held internationally abroad. Under current U.S. tax law, taxes on foreign earnings are deferred until the cash has been repatriated to the U.S. These proposed tax reforms include provisions which will begin taxing these international profits or eliminating this deferral of tax.
The other broad way of “paying” for these changes is by broadening the base and growing the economy. This makes for a great political slogan, however it rarely occurs with enough swiftness to provide measurable change for the average citizen.
The Sky is Falling – What Should I Do?
As with any tax change, speculation and predictions of doomsday will be put forth by both sides of the aisle leading up to and even after the passage and implementation of new laws. As an ordinary (or even sophisticated) taxpayer, it is next to impossible to interpret what is actually occurring. Even Congress doesn’t know the laws it’s voting for, evidenced by historic sayings such as “you must pass it to see what’s in it.” However, it’s not all for naught. There are a select breed of people out there that pride ourselves on being able to not only interpret this meandering, often contradictory code of laws known as the Internal Revenue Code, but navigate it and guide others based on their unique situations. It is in these times of fundamental change that you should lean on your trusted advisors – your CPA, attorney or financial advisor – to provide you with sound advice on how to best navigate this volatile time.