President Trump recently unveiled a bold, long-awaited plan to simplify U.S. individual and corporate taxes. While business owners and others alike await details, Bederson will examine the available information and set out useful scenarios.
Based on recent developments in Washington, D.C, we understand the details of President Trump’s tax reform package will be unveiled in the foreseeable future. As we await specifics on the plan, we are pleased to offer our insights on the broad-based goals included in this historic proposal. Understandably, negotiations will take place once the plan is presented to Congress, but at this stage, we’d like to offer our initial analyses based on the proposed changes to personal taxes, corporate and other business taxes to our clients and other friends of the firm.
At this juncture, the proposed changes look positive for businesses and high-net-worth individuals.
One of the most talked-about proposals involves simplifying the complex federal Tax Code, beginning with a drop in the number of personal brackets from the existing seven that currently levy a top marginal bracket of 39.6%, to only three: 10%, 25%, and 35%. Details pertaining to the income levels that would be subject to each of the new brackets are soon to be released.
Along with the streamlined marginal tax brackets, the Trump administration is proposing to revise the standard deduction, generally doubling it to about $12,600 for an individual and $24,000 for a married couple filing jointly.
The larger standard deductions may help a lot of people who are W-2 wage earners and don’t own a home. The proposal appears to eliminate many itemized deductions other than mortgage interest, charitable giving and retirement plans.
The challenge is that many successful New Jersey individuals pay more than $10,000 a year in property taxes, along with relatively steep state and local taxes, all of which would no longer be deductible. So it is too soon to say whether the new tax plan will be better or worse for different individuals, and therefore too early to offer advice about deferring one’s income to a later period when the new rules will be in effect. We are keeping an eye on the developments, though, and will share updates with you.
On the upside, some much more positive proposals include a call to repeal the 3.8% surtax tax on investment income that was imposed by the Affordable Care Act. Additionally, President Trump wants an outright repeal of the federal estate tax. Unfortunately, New Jersey is one of the few states that also has its own separate inheritance tax (generally levied on siblings, nieces and nephews but not on a spouse or children), which does not appear to be going away anytime soon.
Although the Trump administration has not yet released definitive plans about changing the tax treatment of “carried interest”— a kind of capital gain that currently is subject to favorable taxation—he previously proposed treating carried interest as ordinary income. This could be unwelcome news for some hedge managers and other investment professionals.
Corporate and other business taxes
The new tax proposals are generally good for businesses, with plans to cut the top corporate tax rate from the current 35% to only 15%. Treasury Secretary Steven Mnuchin has said that the planned 15% tax rate will apply to “small and medium-size businesses as well as corporations.” Mnuchin has not released many details about the new scheme, but our analysts think that cash withdrawn from partnerships and other unincorporated or “pass-through” businesses, like Subchapter S corporations may be subject to some form of dividend tax, in addition to the new low business tax rate.
Also, the current U.S. policy of generally taxing corporations on their worldwide income—and then allowing a credit for taxes paid to other jurisdictions—may be eliminated and replaced with a so-called Territorial Tax that would be limited to income “related to” the U.S.
Trump has also spoken about encouraging companies to bring back profits that are currently parked offshore in lower-tax jurisdictions. He plans to do this by reducing the tax on “repatriated” corporate income to a relatively low level.
The bottom line
What can we advise at this point?
We remain generally optimistic because President Trump, as an entrepreneur, is sensitive to the tax and other struggles that businesses face. But we know that his proposals will likely face some headwinds in Congress and, as we have noted, detailed information is soon to be released. Once it is, we will review it carefully and provide you with an appropriately substantive assessment.
In the meantime, individuals and business owners may wish to consult with their tax and accounting professionals before making any significant business decisions—including setting up a new entity or changing the form of an existing one—in light of the revisions and discussions that are likely to continue for some time.
The professionals at Bederson will continue to monitor this evolving situation, and we will continue to keep clients and other friends of the firm informed, assisting them with “what-if” scenarios so they’ll be well-positioned to move in a timely manner once the changes to the tax code are firmed up.
Timothy Brennan, CPA, MST