May 31, 2017
Trump’s Tax Plan is ‘Yuuugge’
On April 26, 2017, President Donald Trump released the 2017 Tax Reform for Economic Growth and American Jobs plan. While brevity is the soul of wit, in tax reform, the devil is always in the details. Bradley Kalscheur compares the president’s proposal with a June 2016 House Republican proposal.
Bradley J. Kalscheur
In April, in a one page, bullet-point document, President Trump outlined his goals for tax reform.
Coupling that outline with previous comments, along with review of the House Republicans’ Blueprint for Tax Reform published in June 2016, estate planners and real estate attorneys can expect to see some changes in tax laws in the near future.
Here is a side by side comparison of the House GOP and president’s proposals, including reforms for both individuals and businesses.
In comparing both proposals, consider the following similarities and differences -- in rates, deductions, the minimum tax rate, and other details:
- The current seven individual income tax rates would be reduced to three in both plans, but neither the brackets nor the differences in the rates between the two plans have been determined.
- Most itemized deductions would be eliminated except for mortgage interest and charitable contributions. To offset the loss of itemized deductions, in both plans the standard deduction would be increased. This means the loss of deduction for state income taxes and for property taxes for individuals. Questions remain whether the remaining deductions would remain as itemized deductions or may move to “above the line” (i.e., those used to determine adjusted gross income).
- Both plans repeal the alternative minimum tax.
- Both plans repeal the 3.8 percent net investment income tax that was enacted to help fund the Affordable Care Act.
- Both plans call for some form of change in estate taxes. The president’s plan calls for the “repeal of the death tax,” while the House Blueprint calls for repeal of the estate and gift tax. Among many things left unanswered in the president’s plan is what is meant by “death tax” – does it only mean the estate and generation-skipping transfer taxes, leaving the gift tax intact?
In both plans, nothing is said about step-in basis of assets at death, which has occurred when assets are included in a gross estate. Will there be limited step-up in basis, which was the case in 2010 when the estate was repealed? Will there be some gain recognition event when assets are transferred at death? What is the fate of the gift tax, which has been a backstop for income taxes even when estate tax repeal has occurred in order to try to prevent shifting of income to lower brackets by gifts?
- The business tax rate would decrease to 15 percent in the president’s plan, and to 20 percent in the House plan.
- More importantly for real estate clients, the top tax rate for pass-through businesses (such as partnerships, limited liability companies, S corporations, and sole proprietorships) would decrease from the top income tax bracket to 15 percent in the president’s plan and to 25 percent in the House plan; but just how much the pass-through income could be taxed at the lower rates may hinge on the amount of cash distributions made from the entity.
The timing and likelihood of tax reform occurring in 2017 is still up in the air, but, in the news conference unveiling the president’s plan, Treasury Secretary Steven Mnunchin expressed the desire to enact something in 2017.
If tax reform only passes by a simple majority in the Senate, similar to the 2001 Tax Act, most provisions would then sunset after 10 years.