President Donald J. Trump (“Trump”) was inaugurated on Friday January 20, 2017 as the 45th President of the United States of America. Whether this makes you happy, sad, or apprehensive, it certainly means that there will be changes. His proposed tax changes seem to be front and center. One of the biggest questions that I keep hearing from people is “What does that mean for the 2016 tax season?” Please read on to see what may be in store for us.
My thoughts on the proposed tax changes
Perhaps you are not anxiously awaiting the arrival of tax changes. As a business owner as well as individual taxpayer, I am very concerned about the impact these changes might have on me. With only a few days in office, President Trump is already on his way to making some major changes. Will those include any of the changes he proposed during his campaign? Only time will tell, but tax reform overhaul is definitely on the list. Some reports say changes may come in two parts. The first part is the repeal of the Affordable Care Act (“ObamaCare”) along with its related taxes and the second part is comprehensive tax reform.
Below I have highlighted some of the proposed tax changes I have been following as a business owner.
Individual Income Tax:
Current individual rates are 10, 15, 25, 28, 33, 35, and 39.6%. Trump’s plan is to lower rates to 12, 25, and 33%, respectively. The House Republicans agree with those figures. Trump is also proposing to increase the standard deduction for joint filers to $30,000 (from $12,600). The personal exemptions would be eliminated (as well as the head-of-household filing status). Trump would also like to cap itemized deductions at $200,000 for married couples. The House GOP wants to limit the type of deductions to capped & modified charitable contributions and mortgage interest.
Capital Gains/Dividends :
The Tax Policy Center has an article explaining how capital gains are taxed. The article clearly points out current tax rates, and shows that taxpayers in the top 40% bracket for ordinary income are taxed 20% on their capital gains. There is also a 3.8% surtax on net investment income for certain high-income taxpayers (see below). Trump’s plan reduces capital gain taxes to 20%, with no surtax . (The House GOP wants 16.5%).
Alternative Minimum Tax:
The Alternative Minimum Tax (AMT) is a parallel tax system that was created by Congress as part of the Tax Reform Act of 1969. Both Trump’s plan the House Republicans’ plan would like to see this eliminated. Consequently, this is a largely talked about change.
Net Investment Income Tax:
The Net Investment Income Tax is imposed by section 1411 of the Internal Revenue Code. The NIIT currently applies at a rate of 3.8% to certain net investment income of individuals, estates, and trusts that have income above the statutory threshold amounts. The NIIT went into effect on January 1, 2013. Again, both Trump’s and the House GOP plans want this eliminated, along with ObamaCare.
Lastly, is the Federal Estate Tax (IRS Form 706). This is a tax on the right to transfer property at death from certain large estates. It consists of an accounting of everything you own or have certain interests in at the date of death. The Fair Market Value is used to determine your gross estate. This includes such things as cash and securities, real estate, insurance, trusts, annuities, business interests and other assets. To read more about this, see this IRS article https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax.
Recently my client Tony De Angelo E.A., J.D. of the Paragon Trust Company of New Haven CT, told me he is of the belief that the Trump administration certainly wants to repeal the Federal Estate Tax, but the timing and revenue offsets of such a repeal have yet to be determined.
As a result of all these proposed changes, my advice is to keep watching and listening. Sign up for IRS alerts. Work closely with your tax preparer and ask questions. This is a matter that affects every taxpayer, so we’ll all be waiting together to see how this unfolds.