By now, you have heard the news that Donald J. Trump is the President-Elect of the United States. As such, he will have a tremendous amount of input on federal tax law. So, what has he proposed?
Individual Income Taxes
Currently, there are 7 ordinary income tax brackets ranging from a 10% tax rate to 39.6% tax rate. Donald Trump has proposed reducing this to only 3 ordinary income tax brackets ranging from a 12% tax rate to a top rate of 33%.
Donald Trump has proposed keeping the capital gains rates the same. Under his proposal, individuals in the 12% ordinary income tax bracket would pay 0% on their capital gains. Individuals in the 25% ordinary income tax bracket would pay 15% on their capital gains. Individuals in the 33% ordinary income tax bracket would pay 20% on their capital gains.
In addition, high-income Americans are currently subject to a 3.8% Net Investment Income Tax. Donald Trump has proposed eliminating this surtax along with the rest of the Affordable Care Act.
In terms of deductions, the Trump plan increases the standard deduction. For married joint filers, the standard deduction would increase from $12,600 to $30,000. However, this comes at the cost of the personal and dependency exemptions which would be eliminated.
Finally, Donald Trump’s proposal puts a cap on the amount of itemized deductions that can be claimed. This cap is $100,000 for single individuals, and $200,000 for married couples filing jointly.
Business Income Taxes
The Trump tax plan calls for massive changes for businesses.
Currently, the only type of business entity that pays “business taxes” are c-corporations. All other business entities (S-corporations, partnership, and Limited Liability Companies (LLCs)) are “pass through” entities. That means that income from those entities pass through to the individual owners, and taxes on that income are paid by the individual owners at their ordinary income rates.
The Trump proposal instead reduces the business tax rate from a maximum of 35% to 15%, and creates a unified business rate. Instead of pass through entities paying ordinary income tax rates, they would instead pay the same 15% rate that c-corporations would pay.
Another significant change would be the treatment of capitalized assets. Currently, certain assets such as machinery and equipment must be capitalized and the acquisition cost is depreciated (expensed) over a number of years. Donald Trump’s proposal would allow the full cost of these assets to be expensed in the year of acquisition.
Finally, businesses would no longer be able to take a deduction for many expenditures under this proposal.
Under current law, estates with more than $5.45 million of assets ($10.9 million if married and electing to utilize the portability election), adjusted annually for inflation, are subject to a 40% estate tax. The beneficiaries of the estate then receive a “step-up” in value for the assets they inherit.
The Trump tax proposal eliminates the estate tax, and along with the the “step-up” in value beneficiaries would receive, but only for beneficiaries of an estate worth more than $10 million.