President Trump announced what has been called “the biggest tax cut” in U.S. history on April 26. The one-page plan provides 12 bullet points to simplify the tax code and reduce taxes. Six points in the one-pager worth remembering are:
1) Reducing the number of individual tax rates to three: 10%, 25% and 35% from seven: 10%, 15%, 25%, 28%, 33%, 35% and 39.6%.
2) Doubling the standard individual tax deduction to $12,700 for single filers and $25,400 for joint filers.
3) Repealing the alternative minimum tax.
4) Eliminating the estate tax.
5) Repealing the 3.8% Obamacare tax on net investment income on incomes generally above $200,000 and return the top tax rate on capital gains and dividends to 20%.
6) Reducing the tax rate to 15% from 35% for businesses, presumably for corporations S corporations and partnerships.
The plan will depend on stakeholders and Congress developing details that will provide “massive tax relief, create jobs, and make America grow again,” according to the one-pager.
The remaining six points are less specific and range from, “providing tax relief to help families with child and dependent care expenses,” to, “eliminating most of the tax breaks that mainly benefit high-income individuals.” According to a statement by Gary Cohn, President Trump’s chief economic advisor and director of the National Economic Council, “home ownership, charitable giving, and retirement savings will be protected – but other tax benefits will be eliminated.”
The “Business Reform” section includes points imposing a one-time repatriation tax that would permit U.S. companies to bring back trillions of dollars held overseas at a previously proposed 10% rate. Two points require the most clarification and relate to eliminating tax breaks for special interests and a territorial tax system to level the playing field for American companies.
The details may consume the rest of 2017 but it appears business tax cuts are coming and those cuts will not be limited to regular corporations. Therefore, relinquishing subchapter S elections or converting partnerships or limited liability companies to regular corporations is premature especially since the plan is not expected to be retroactive for 2017.
Over the last 40 years the words, “tax simplification,” has meant employment insurance for CPAs. Although the rhetoric from Gary Cohn does represent a broadside to impact the simplified tax prep industry, Cohn noted in his statement, “In 1935, we had a one-page tax form consisting of 34 lines and two pages of instructions. Today, the basic 1040 form has 79 lines and 211 pages of instructions. Instead of a single tax form, the IRS now has 199 tax forms on the individual side of the tax code alone. Taxpayers spend nearly 7 billion hours complying with the tax code each year, and nearly 90% of taxpayers need help filing their taxes.”
Cohn’s statement continues, “We are going to double the standard deduction so that a married couple won’t pay any taxes on the first $24,000 of income they earn. So in essence, we are creating a 0% tax rate for the first $24,000 that a couple earns.
“The larger standard deduction also leads to simplification because far fewer taxpayers will need to itemize, which means their tax form can go back to that one simple page.”
The one-pager began with a section titled “Goals For Tax Reform.” Bullet points describing the goals included: Simplify our burdensome tax code; Provide tax relief for American families—especially middle –income families; and Lower the business tax rate from one of the highest in the world to one of the lowest.
Reiterating the main goal, Cohn stated, “Job creation and economic growth is the top priority for this Administration, and nothing drives economic growth like capital investment.”
The one-pager concludes with a section titled “Process,” describing the plan wherein the Trump Administration will continue working with the House and Senate to develop details of the plan than can pass both chambers.Let the Congressional lawmaking games begin.