There’s an old saying that the only thing that doesn’t change in politics is the fact that you always get change. Here’s a sampling of what we expect to happen in individual tax law under a new administration. For business changes, register at the bottom of this post to receive updates as they are available.
[Editor’s note] For any of these proposed changes to become law, President-elect Trump and Congressional Republicans must first hammer out the differences between their tax proposals. Once an agreement is reached, a bill must be introduced in the Ways and Means Committee and must then be passed by the House and the Senate. During this process, the proposals outlined in this letter may be changed or eliminated and new provisions could be added.
Proposed Individual Rate Changes
There are currently seven tax rates for individual taxpayers: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. For 2016, a married couple filing a joint return pays tax at a 10% rate on the first $18,550 of taxable income (the first $9,275 if single), and pays tax at a 39.6% rate on taxable income in excess of $466,950 (in excess of $415,050 if single). Under President-elect Trump’s proposals, there would be only three income tax rates as follows:
|12% of Taxable Income to||75,000||37,500|
|25% of Taxable Income to||75,001-225,000||37,501-112,500|
|33% of Taxable Income to||225,000||112,500|
Capital Gain and Qualified Dividend Rates
Long-term capital gains and qualified dividends are currently taxed at the following rates:
1) Zero percent tax rate where the capital gain or dividend income would otherwise be taxed at 15% or less (for 2016, taxable income up to $75,300 for joint filers and $37,650 for single individuals is taxed at 15% or less),
2) 15% tax rate where the capital gain or dividend income would otherwise be taxed above 15% and below 39.6%, and
3) 20% tax rate where the capital gain or dividend income would otherwise be taxed at 39.6% (for 2016, taxable income in excess of $466,950 for joint filers and $415,050 for single individuals is taxed at 39.6%).
Under the Trump proposal, the current tax rates for long-term capital gains and qualified dividends would stay the same after being re aligned to fit the new 3 income tax rate brackets as follows:
|Tax Rate- Capital Gain & Qualified Dividends||Joint||Single|
|0% if taxable income is less than||75,000||37,500|
|15% if Taxable Income is||75,001-225,000||37,501-112,500|
|20% if Taxable Income is greater than||225,000||112,500|
Increase In Standard Deduction: Mr. Trump’s proposal would increase the standard deduction: 1) To $30,000 (up from the current $12,600) for married individuals filing joint returns, and 2) To $15,000 (up from the current $6,300) for single individuals.
Elimination Of Personal Exemptions: The deduction for personal exemptions (currently $4,050 per exemption) would be eliminated.
Itemized Deductions Capped: Under Mr. Trump’s proposal, the maximum amount of itemized deductions for a married couple filing a joint return would be capped at $200,000 (for single individuals, the cap would be $100,000).
Alternative Minimum Tax Eliminated: Under current law, certain taxpayers may be subject to an “alternative minimum tax” (AMT) in addition to their regular tax liability. For example, the AMT could be triggered where an individual deducts personal exemptions, the standard deduction, state and local income taxes, and real estate taxes. The AMT could also apply to individuals with large capital gains, large amounts of dividend income, or who exercise incentive stock options. The Trump proposal would repeal the AMT.
Repeal Of The 3.8% Net Investment Income Tax And The .9% Additional Medicare Tax: The Affordable Care Act (ACA) imposes a 3.8% Net Investment Income Tax (3.8% NIIT) on certain investment income (e.g., interest, dividends, capital gains, passive business income) for higher- income taxpayers. ACA also creates an “Additional Medicare Tax” of .9% on wages and other earned income of higher-income taxpayers. Consistent with his proposal to repeal ACA , Mr. Trump would repeal both of these taxes.
New Tax Breaks For Child And Elder Care Expenses: During his campaign, Mr. Trump proposed new tax breaks to assist individuals incurring child and elder-care expenses. Generally, his proposals include:
1) An above-the-line deduction (i.e., allowed whether or not the taxpayer claims itemized deductions) for certain child and elder care expenses. The deduction would be available to married individuals filing joint returns with total income of $500,000 or less and to single individuals with total income of $250,000 or less;
2) A refundable credit for childcare expenses equal to 7.65% of child care expenses (not to exceed 50% of the taxpayer’s FICA taxes) and available to married individuals filing a joint return earning $62,400 or less ($31,200 or less for singles); and
3) A new tax-favored dependent care savings account (taxpayers could contribute up to $2,000 annually to this account with the government possibly matching a portion of the contribution).
Repeal of the Estate Tax: The Trump proposal includes a complete repeal of the Federal estate tax. It appears that the proposal also includes a carryover basis provision for income tax purposes to the extent the value of assets included in the estate exceed $10 million.
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