As we all know, some politicians will say and promise anything to win your vote and get elected into office.Professional
When it came to U.S. income taxes, President-Elect Trump’s campaign platform included many tax cuts and reform. It remains to be seen whether or not we will see any of these tax cuts after he takes over the Oval Office in January of 2017 or will most of them be added to the numerous broken promises of previous President-Elects.
As of now, the following proposed tax changes are based on campaign materials and have yet to been refined and made into tax law. Tax policy makers may be busy in the coming months to figure out the details as well as when and how to implement the changes.
Corporate Income Taxes
One of the most significant tax cut that President-Elect Trump proposes is the reduction of U.S. federal corporate income tax to a flat 15% tax rate. The current federal corporate income tax rates are based on gradual tax brackets topping out at a maximum rate of 35% which results in a potential 20% tax savings for large profitable companies. The 15% federal corporate income tax rate extends basically to most non-incorporated businesses such as sole proprietorships, partnerships and S Corporations for profits that are put back into the business.
Trump also promises to double the small business equipment (and other qualifying assets) expensing election to $1,000,000 as well as immediate deduction of all new equipment investments (currently the deduction is at 50%) therefore removing the need for small businesses to depreciate any equipment purchases over the asset’s useful life for tax purposes.
In order to encourage companies to invest their profits in the U.S. President-Elect Trump has proposed a “tax holiday” for U.S. companies to repatriate offshore earnings of their foreign subsidiaries. The plan is to allow companies to bring back foreign earnings at a 10% toll charge payable over 10 years. Large profitable corporations normally pay up to 35% in federal income tax so this could mean a significant tax break for American public companies such Apple, Google and Microsoft. Economists currently estimate there is over U.S. $2 trillion of cash sitting offshore. A similar tax holiday was implemented in 2004 under the Bush administration but the plan did not appear to create more jobs or boost the American economy. A dozen years later even more money flowed offshore due mainly to high U.S. corporate tax rates. It could however be different this time around if coupled with the proposed reduction of the U.S. corporate federal tax rate to 15%.
Individual Income Taxes
While not as extensive as the corporate tax cuts, the current U.S. individual income tax rates which gradually range from 10 to 39.6 percent with seven tax brackets will be reduced to three brackets of 12, 15 and 33 percent under Trump’s plan. Most low income families with income less than U.S. $30,000 would essentially pay little or no tax under the new plan. Despite that, it appears that the plan already has some flaws that could result in a lower income families or individuals paying more tax than before the cut in tax rates if the low-income family has a large number of dependents.
Here Today Gone Tomorrow?
In addition to the income tax rate cuts, President-Elect Trump’s tax plan includes the repeal three major components of current tax law including alternative minimum tax, estate and gift taxes and the Affordable Care Act.
The alternative minimum tax (AMT) which had been around since 1969 was implemented with the goal of making high income earners pay their fair share of U.S. income tax. The AMT involved having a separate calculation of AMT income and paying AMT on that if it was higher than your original tax bill. This made tax return preparation more cumbersome but only about three percent of the tax returns filed in 2014 paid AMT tax. What is ironic is that AMT actually affects income earners from $200,000 to $1,000,000 more than it does for those with income of over $1,000,000.
U.S. estate taxes may be applicable when a high net worth individual including a non-U.S. resident with U.S. assets passes away. A tax of up to 40 percent is then levied on the fair market value of U.S. assets in the deceased’s estate. Currently, there is a lifetime estate and gift tax exemption of $5.45 million (which creeps up annually due to inflation). While estate taxes only affects 0.2 percent of the American population, Trump’s plan is silent on what will happen to gift taxes since each taxpayer is allowed to gift only $14,000 per year per recipient (spouses excepted) tax free and each gift over the limit will reduce the $5.45 million lifetime estate and gift tax exemption.
Under President Obama’s administration, The Affordable Care Act (ACA or Obamacare) created not only mandatory health insurance plans for most taxpayers (or pay penalties) but also the Net Investment Income (NII) tax. The NII is a 3.8 percent Medicare tax on net investment income if the adjusted gross income of the taxpayer exceeds $200,000 for individuals, $250,000 for couples filing jointly and $125,000 for spouses filing separately. According to Vice President-Elect Pence, repealing Obamacare is one of their top priorities once they take office and replace it with free-market solutions.
What to expect?
No one really knows when and if these proposed tax changes will ever become law. At the moment these are just campaign promises, a lot work is still required to determine what specific changes need to be made, figure out how it will affect taxpayers in general and how to implement it. Similar to a fisherman casting a wide net and catching a dolphin or endangered sea turtle by accident, tax law changes or policies may also hurt certain taxpayers inadvertently so it requires careful thought and planning.
Rest assured our team will closely monitor any tax law changes and will be happy to assist you in determining how any changes can affect your specific situation as well as identify any opportunities for tax savings.
About the Author:
Lionel Chen is Director of US Corporate Tax Services with Trowbridge. Since 1997, Lionel has assisted his clients with cross border tax issues to successfully navigate the U.S. tax system. Having worked as both an independent consultant and a Big 4 tax manager, Lionel has worked with a wide range of clients from owner-managed businesses, billion dollar companies and accounting firms. In addition, he has consulted clients with U.S. businesses on tax efficient structures and reorganizations such as mergers, acquisitions, and divestitures. For more information, please contact him at lionel.chen@trowbridge.ca.