A much anticipated and, perhaps, over-hyped news conference rolling out the Trump Administration’s tax reform plan generated very little “new news” yesterday. Treasury Secretary Steven Mnuchin and National Economic Director Gary Cohn presented an outline of a plan that is very similar to the talking points the President promoted on the campaign trail. A reduction of the corporate tax rate from 35% to 15% – check. The consolidation of income tax brackets and the lowering of income tax rates – check. The elimination of the estate tax – check. The repeal of the Alternative Minimum Tax and the Net Investment Income Tax implemented with the Obamacare legislation – check, check. The 23-minute briefing did not break much new ground and it will be interesting to see whether the Administration will be able to enact the type of generational tax reform similar to that last passed in 1954 and again in 1986.
Perhaps the most interesting tidbit of information from yesterday’s news was a change in the Administration’s proposal for the treatment of itemized deductions for individual taxpayers – expenditures including state and local taxes, real estate taxes, medical costs, charitable contributions, home mortgage interest, and investment fees, among others. During the campaign, the President promoted a plan to cap the amount of these expenses a taxpayer could use to offset income at $100,000 for single taxpayers and $200,000 for married couples. In yesterday’s briefing, the Administration announced its intention to eliminate all itemized deductions with the exception of the home mortgage interest and charitable contribution deductions. This proposal more closely mirrors the one supported by the Republican leadership in the House of Representatives and, if enacted, would alleviate some anxiety felt by homeowners and the very philanthropic, not to mention the real estate and charitable communities. On the other hand, taxpayers in high-tax states such as California, New York, and many others in the Eastern part of the United States would lose a valuable tax deduction, precipitously increasing their share of the overall (state plus federal) tax burden.
Another proposal that is not new but could be very impactful, if enacted, is the reduction in the tax rate of pass-through entities – business entities set up LLCs and “S” Corporations – to match that of traditional “C” Corporations. Currently, pass-through income is taxed at individual income tax rates; if that income were subject to the proposed corporate rate of 15% rather than the (highest) proposed individual rate of 35%, then you could see a huge shift in the way individuals and business organize their affairs.
Congress and the Trump Administration have a lot of work ahead to come up with a tax bill that can ultimately be passed and signed into law. The devil will be in the proverbial details with regard to sorting out the winners and losers of any changes. It’s a process that will take months and could very likely extend into 2018. And left unanswered yesterday was the financing of such a tax cut and whether an increase in economic growth and activity will be able to offset the revenue lost by a reduction of rates and repeal of other provisions. We’ll let the economists and budget analysts sharpen their pencils on that one. If anything, yesterday’s announcement was the Administration reiterating its position that taxes on corporations and individuals are too high and they intend to do…something…about it.
Learn more about Adam Ochlis, CPA, MST, Partner & Senior Client Advisor.
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