by Stephen Reed | Accounting News, Bookkeeping, Business Consulting, IRS, News, Professional Services, Resources, Tax, Tax Consulting, Tax Planning, Tax Planning - Individual, Tax Preparation - Individual
With their first plan shot down in Congress, the GOP has released another, broader tax framework as the Trump Administration attempts to shift the tax code. This new plan has many elements that Congress will need to hash out before anything is signed into law, but taxpayers of all income levels are wondering how this plan may affect them personally. Below are five major developments in the new plan that could affect you come tax season:
- Rate Shift
Our current code has seven different income tax brackets, but the new plan would drop that number down to three: 12, 25 and 35 percent. Although the plan does not specify which income levels would be taxed at each new rate, the wealthy would likely see the greatest benefit since the current top bracket at 39.6% would drop to 35%. The current lowest bracket (at 10%) would see an increase to join the 12% bracket, but the plan claims to aid families in that bracket through an increase in the standard deduction and a greater child tax credit.
- Deduction Increase (for most)
For many taxpayers, the new plan would almost double the current standard deduction. Filers who claim multiple children would not see as high of a increase, but could potentially see that offset by a steeper child tax credit. Presently, about 70% of taxpayers take the standard deduction as it is higher than itemizing. However, experts believe that number would increase significantly if the standard deduction is doubled. The GOP’s plan would remove other deductions to offset the increased standard deduction, but the charitable contribution and mortgage interest deductions would be kept.
- Some Taxes and Deductions Eliminated Entirely
The largest deduction that would meet its end with the new GOP plan is the local and state tax deduction. This deduction is often taken in states where taxes, and average income, is higher, states that are often Democratic. Other taxes that would be eliminated include the alternative minimum tax and the estate tax for those who inherit funds in excess of $5.49 million.
- New Tax Rate for “Pass-Through” Businesses
S corporations, sole proprietorships and partnerships could see a new tax rate at 25% under the new plan. Currently, those “pass-through” businesses pay at the individual rate of their owners, and those businesses make up about 95% of the nation’s business demographic. Although many business owners currently pay a rate lower than 25%, just under 2% of those business owners pay the top rate of 39.6%, which means they could see a significant drop in rate if they are permitted to incorporate as a “pass-through.”
- Change in the Corporate Tax Code
The current plan taxes corporations at 35%, but the new plan would drop that rate to 20%. To offset this steep drop in rate, the proposal submits to eliminate certain business deductions and credits. The plan suggests that the deduction for domestic production could be eliminated, while maintaining exceptions for low income housing and research and development, but leaves many of those choices up to Congress.
Congress must still comb through the GOP’s newest plan and make adjustments before a finalized plan is voted upon, so taxpayers should prepare for more adjustments to be made before anything is signed into law. As developments arise, MKR will continue to keep our clients up to date in future newsletters.
by Stephen Reed | Accounting News, IRS, News, Resources, Tax, Tax Planning, Tax Planning - Individual, Tax Preparation - Individual
Now that our 45th President has officially been inaugurated, many of his campaign claims are beginning to take shape, including his tax plan. However, it seems that President Trump’s plan does not align as closely as one might think with the GOP’s plan, which has primarily been outlined by Republican leader Kevin Brady, Chairman of the House Ways and Means Committee. Below is a brief summary of the ways Trump and Brady’s plans differ and what each could mean for taxpayers.
Tax Brackets
Trump and Brady agree in decreasing the number of tax brackets from seven to three, at 12%, 25% and 33% respectively, but they differ in the income ranges for each bracket. Brady’s rates would simply align with the current rates and brackets, meaning taxes would only increase for those who fall under the 10% tax bracket of current law; they would see their rate rise to 12%. Under Trump’s plan, not only would those in the 10% bracket rise to 12%, but some middle classers could see their rate rise to 33%, namely those who make more than $112,500 per year, whereas presently, the 33% rate was not effective until individual income reached $191,651.
Gains/Dividends Rates
Trump would seek to keep the current capital gains and dividend rates, 0%, 15% and 20%, grouping them with his three desired tax brackets. But, aligning the gains and dividends rates would mean both a tax increase as well as an increase from 15% to 20% in gain and dividend rates for many in that middle tax bracket. Brady’s plan varies in that he would apply his tax rates, 12%, 25% and 33%, to gains and dividends rates, while also allowing taxpayers to deduct 50% of their capital gains and dividends and 50% for interest income. Essentially, while certain taxpayers could see an increase in capital gains and dividends rates under Trump’s plan, all taxpayers would see a decrease in their interest/capital gains/dividends rates under Brady’s plan.
Itemized Deductions
While Trump would look to simplify deductions by capping them all at $100,000 if single and $200,000 if married filing jointly, Brady’s would look to eliminate all itemized deductions other than charitable contributions and mortgage interest deductions. Neither plan would be necessarily problematic for lower and middle classes, but some upper classers may take issue with Trump’s deduction caps, and many states and lobbyists may dislike Brady’s elimination of certain deductions altogether.
Standard Deductions/Personal Exemptions
Trump and Brady do agree on increasing the standard deduction, but Brady would increase the deduction from the current $6,300 to $12,000 (if single); Trump would jump up to $15,000. Both plans would also do away with personal exemptions. Taking away personal exemptions could be problematic for families though, which Trump would seek to alleviate by adding child care incentives (although paying for child care in the first place is necessary to get the incentive), while Brady would simply increase the current child tax credit from $1000 to $1,500.
Trump and Brady do align in their desire to lower business tax rates and eliminate estate taxes, but the execution of both differ as well. President Trump has stayed busy signing executive orders in his first weeks in office, but it does not appear that immediate tax reform is among his changes just yet. It does appear, though, that the Trump administration and the GOP need to refine and better align their respective proposals before presenting a finalized plan for tax reform to the American public.
