On Wednesday, April 26th, the White House released President Donald Trump’s tax reform goals and key priorities. The reform proposes slashed corporate tax rates, flattened individual marginal income tax brackets, and repeal of the estate and alternative minimum taxes.
Most of the reforms adhere to the policies proposed last fall during President Trump’s campaign. According to the Journal of Accountancy, “Most prominently, cutting the corporation income tax rate from its current 35% to 15% and extending it to pass-through entities, i.e., S corporations, partnerships, and entities taxed as partnerships.”
President Trump plans to replace the current seven graduated tiers of marginal rates (10%, 15%, 25%, 28%, 33%, 35% and 39.6%) with three: 10%, 25%, and 35%. There was no formal statement made as to what income levels those rates would apply.
President Trump also called for repeal of the net investment income tax of 3.8% imposed on unearned income and gains of high-income taxpayers by the 2010 Patient Protection and Affordable Care Act, P.L. 111-148. Although limiting itemized deductions to mortgage interests and charitable contributions, the proposal would double the standard deduction.
The previous proposed repeal of estate taxes currently only applies to estates larger than $5.49 million per individual. President Trump called for ending “tax breaks that mainly benefit the wealthiest taxpayers.” There were no additional details provided. “The proposal did not specifically address the tax treatment of carried interests, which are currently taxed at capital gain tax rates. (President) Trump has said in the past he favors curtailing this treatment.” (Journal of Accountancy, 2017).
In addition to lowering the top tax rate to 15%, President Trump’s reform hopes to implement a territorial system of taxation (one which likely will exclude from taxation foreign earned income.) This proposal would also impose a “one-time tax” on corporate earnings realized and held overseas on which tax is deferred; possibly consistent with, a deemed reparation tax that President Trump has previously proposed at a 10% rate.
The Journal of Accountancy states, “The plan does not specifically mention pass-through entities, but when he was a candidate, Trump’s tax plan included a provision that would allow owners of pass-through entities to be taxed at the proposed 15% business rate. When asked if this would provide an incentive for individuals to form pass-through entities to avoid the higher individual tax rates, Mnuchin answered, “We will make sure that there are rules in place to make sure wealthy people can’t create pass-through’s to lower their taxes.” President Trump plans for his proposed reform to be revenue-neutral.
If you have questions about President Trump's proposed tax reform, please contact your Brinker Simpson accountant.