Tax Update - April 2017

2nd May 2017

Tax Update - April 2017

Now that the 2016 tax season is in the books, we can begin to discuss the potential tax changes that are being discussed in Washington so we can begin planning to maximize your 2017 tax savings. While there’s still a lot that is not certain, I wanted to share with you the proposals from President Donald Trump’s tax plan that are being discussed. I’ll update you as more updates are released, but please feel free to contact me if you have any questions.

Individual Tax

• President Trump’s tax proposal would reduce the number of tax brackets for individuals from seven to three (10%, 25%, and 35%). Currently, the highest tax bracket is 39.6% for income over $467,000 for a married couple and $415,000 for single taxpayers. The proposal did not say where the new brackets begin and end.

• The new tax proposal would also double the standard deduction for taxpayers. In 2016, single individuals could deduct $6,300 and married filers could deduct $12,600. However, only mortgage interest and charitable contributions would remain for taxpayers choosing to itemize deductions. Deductions such as state and local income taxes, real estate taxes, medical expenses, and investment expenses would be eliminated under the new plan.

• President Trump’s proposed tax plan would repeal the alternative minimum tax (AMT) and the 3.8% net investment income tax. AMT, which taxes income at 28% to households who would otherwise benefit from a lower tax rate due to certain deductions, would be eliminated. The net investment income tax, which taxes interest, dividends, capital gains, and passive income at an additional 3.8% tax rate to high income households, would also be eliminated.

Estate Tax

• Another major proposal would be the removal of the estate tax. Currently, the 40% estate tax applies to any estates larger than $5.49 million per individual.

Business Tax

• President Trump’s proposed tax plan would cut the highest corporate income tax rate from 35% to 15%. However, this proposal would not just affect C Corporations, but any business income, even from a pass-through entity such as a partnership or an S Corporation. Currently, income from a pass-through entity is taxed at the partner or shareholder’s individual tax rate, so a 15% tax rate could lead to major tax savings.

• The proposal also calls for a territorial system of taxation. Currently, the U.S. employs a worldwide tax system. This means that a corporation headquartered in the United States must pay corporate tax on all of income earned, regardless if it is earned within the United States or overseas. The taxpayer would then receive a foreign tax credit for any foreign taxes paid on income taxed to another country. This can cost U.S. taxpayers because if they only pay 20% tax to a foreign country but are taxed at the 35% U.S. tax rate, they owe an additional 15% to the U.S. The new proposal calls for a territorial system of taxation, which only taxes income earned within the United States. The theory behind this would allow U.S. corporation to compete with foreign corporations on a level playing field.

Again, these are just President Trump’s initial proposals and these plans may never come to fruition. However, if they are enacted by Congress, there are plenty of potential tax savings strategies that we could discuss to plan for the 2017 tax year. If you have any questions, please do not hesitate to contact me.