In a perfect world, I would have written this article after we received more clarification on the one-page tax plan Donald Trump's administration released nearly two months ago. I would be able to analyze its points and let you know how it would affect you. Unfortunately, we do not live in a perfect world, and there are times at which the federal government moves at a less than desirable pace. As with the recent healthcare debate, tax policy is a polarizing, complicated playing field laced with special interest groups, political landmines, and entrenched ideological factions. Though it is easy to say "let's simplify the tax code and lower taxes!", it's often far more difficult to articulate - much less agree upon - the "best" way to do so.
Donald Trump's Plan
The Trump Tax Plan was intended as a guide for Congress. Though the media ridiculed the plan for its lack of detail, it isn't the President's responsibility to draft legislation. Rather, the one-page tax plan provided a best case scenario of items the President wished to see in new tax legislation.
The highlights -
Repealing the 3.8% Net Investment Income Tax - This would reduce high net worth individuals' tax burdens. Currently, long term capital gains and qualified dividends are taxed at a maximum rate of 23.8%, while short term capital gains and interest are taxed at a maximum rate of 43.4%. For private equity investors, owners of interest charge domestic international sales corporations, ESOP qualified replacement property holders for which securities have zero basis, and successful investors, this 3.8% tax cut could be noteworthy.
Repealing Alternative Minimum Tax - This would remove the floor for high net worth individuals' income tax rates, simplify the compliance process considerably, and eliminate the need to keep separate depreciation and basis schedules. While this would be a positive step forward, it is a political landmine that some in congress may not be willing to tackle for fear of being seen as "cutting taxes for the rich."
Repealing the Estate Tax - In 2014, gift and estate tax provided 0.6% of the federal government's revenues while causing a tremendous headache for high net worth individuals and owners of closely held companies. To us, the estate tax serves only as a punitive measure for being successful during your life. Though it derives a historically insignificant amount of revenue for the federal government, the estate tax remains a political hot potato and powerful bargaining chip because the tax is cast as a populist win and any attempt to repeal it is met with considerable negative press. Though repealing the estate tax would further simplify the tax code and provide relief for high net worth individuals and closely held company owners, Congress may find that it is far more easily said than done.
Instituting a 15% business tax rate and territorial tax system - This point seems to be very important for Donald Trump, and we think it would be a positive measure for businesses. For years, large publicly traded companies have sheltered income from United States taxation by holding their intellectual property and pushing a vast majority of their sales through lower tax foreign jurisdictions. This, despite many calls for the opposite, is fully legal. A 15% business tax rate and territorial system would serve to bring these sales back home - as long as the law is written in such a way to clarify what a domestic sale truly is. Curiously absent from the one-page tax plan are the types of business entities to which this new tax rate will apply. Though it would be a significant win for S-Corporation shareholders, partnership members, and sole proprietors to be taxed at 15%, we think the potential for employees to become "subcontractors" or small business owners by virtue of changing the way they're paid is a notable risk that would render such a provision dead on arrival.
Changing itemized deductions - This is listed as "protect home ownership and charitable gift tax deductions, double the standard deduction, and eliminate targeted tax breaks that mainly benefit the wealthiest taxpayers" on the President's tax plan. Though there has been no clarification to this point, we assume the President would like to eliminate the investment interest deduction, portfolio deductions, and possibly medical expense deductions. Doubling the standard deduction would simplify the compliance process for low and middle income taxpayers, but repealing the investment interest and portfolio deductions could prove disastrous for successful investors. The upshot, however, is that high income investors currently subject to alternative minimum tax could see little to no change to their tax burden resulting from the elimination of portfolio deductions, because these are added back to alternative minimum taxable income, a concept that would be eliminated with the new tax plan.
We have a long way to go before any tax reform bill is ratified. The changes discussed in the Trump tax plan are significant, and the changes to the tax code could necessitate a complete re-write. The administration and congress have not made any further steps on the American Healthcare Act, which will presumably precede any meaningful debate on tax policy. Though the President's original goal was to have tax reform in place by the end of this year, we think it is unlikely that a massive overhaul of the tax code could be accomplished in such a short time, especially considering the difficulties exhibited during the American Healthcare Act debate and subsequent votes.
Perhaps most importantly, we do not think it is time to rest with tax planning as a result of this potential setback. Though tax reform may not happen this year, we think it is an excellent time to reevaluate your charitable giving and estate plans in light of the proposed changes. After all, it never hurts to have a comprehensive tax efficiency plan.
Unsure of your long term tax plans? Do you have tax questions? Call me at (513)554-4600 or e-mail me at firstname.lastname@example.org for a complementary, no obligation consultation. At Pitcher, Enders & Drohan, we make taxes painless again!