A Look at President Trump’s Proposed Tax Overhaul

The following content is an expansion of an article in our most recent Client Alert newsletter.
 
Below are some of the highlights of President Trump’s most recent plan to overhaul the U.S. tax code. At this time these are merely proposed changes as details of how they will be implemented have not yet emerged.
 

Trump’s Tax Proposal: For Individuals

 

1. Reduce the number of income tax brackets from seven to three.

For 2017, there are currently seven income tax brackets with tax rates that range from 10% to 39.6% depending on the filing status of the taxpayer. These are outlined below:

Single		Married Filing Jointly		Head of Household
Rate	Taxable Income	Rate	Taxable Income	Rate	Taxable Income
10%	$0 to $9,325	10%	$0 to $18,650	10%	$0 – $13,500
15%	$9,325 to $37,950	15%	$18,650 to $75,900	15%	$13,500 to $50,800
25%	$37,950 to $91,900	25%	$75,900 to $153,100	25%	$50,800 to $131,200
28%	$91,900 to $191,650	28%	$153,100 to $233,350	28%	$131,200 to $212,500
33%	$191,650 to $416,700	33%	$233,350 to $416,700	33%	$212,500 to $416,700
35%	$416,700 to $418,400	35%	$416,700 to $470,700	35%	$416,700 to $444,500
39.6%	$418,400 +	39.6%	$470,700 +	39.6%	$444,550 +

 

Under Mr. Trump’s proposal, the number of tax brackets would be reduced from seven to three – with corresponding tax rates of 10%, 25%, and 35%. At this time, it is not known how this proposed change will affect the individual taxpayer – as the range of taxable income brackets and their corresponding tax rates is not known.

 

2. Reduce the top marginal tax rate from 39.6 percent to 35 percent

For 2017, the U.S. tax code has a top marginal income tax rate of 39.6% for single taxpayers with taxable income in excess of $418,400. For married filing jointly and head of household, the 39.6% tax bracket applies to taxable incomes in excess of $470,700 and $444,500 respectively. While Mr. Trump proposes to reduce the top marginal tax rate from 39.6% to 35%, it is not known at this time what the range of taxable income will be for each of the three tax brackets.

 

3. Double the Standard Deduction

Under current U.S. tax law, taxpayers can claim either the standard deduction or itemize their deductions – whichever is greater. The standard deduction is a fixed dollar amount that reduces the income you are taxed on and varies according to filing status. Under Mr. Trump’s plan, the standard deduction would double from current amounts.

Filing Status	2017 Deduction	Proposed Deduction
Single	$6,350	$12,700
Married Filing Jointly	$12,700	$25,400
Head of Household	$9,350	$18,700

 

4. Itemized deductions (Schedule A)

For those taxpayers who itemize their deductions in lieu of taking the standard deduction, the U.S. tax code allows the following expenses to be taken as itemized deductions on Schedule A. The end result is similar to the standard deduction – it enables a taxpayer to reduce the income upon which they are taxed. However, under Mr. Trump’s plan, he would eliminate all the current allowable deductions except for the mortgage interest and charitable contribution deductions.

Current Allowable Itemized Deductions	Under Mr. Trump’s Plan
Medical/dental expenses (in excess of 10% AGI)	Eliminated
Taxes You Paid      State/local income taxes or general sales tax      Real estate taxes      Personal property taxes	Eliminated Eliminated Eliminated
Interest You Paid      Home mortgage interest/points	Not eliminated
Gifts to Charity	Not eliminated
Casualty and Theft Losses	Eliminated
Job Expenses/Miscellaneous Deductions (in excess of 2% AGI)	Eliminated
Other Miscellaneous Deductions	Eliminated

 

5. Repeal of the Alternative Minimum Tax, Estate Tax, and Tax on Investment Income

Alternative Minimum Tax (AMT)

Under current tax law, certain tax benefits can significantly reduce a taxpayer’s regular tax amount. Under AMT, certain deductions are disallowed such as state and local income taxes and real estate taxes. The disallowance of these “preference items” can cause the AMT to be significantly greater than a taxpayer’s regular tax. AMT affects many New Jersey taxpayers. Mr. Trump’s plan would eliminate the AMT.

 

Estate Tax

For 2017, the IRS has announced the estate tax exemption is $5.49 million per individual ($10.98 million for married couples). This means under current tax law, that an individual can leave $5.49 million to heirs and pay no federal tax. Mr. Trump’s plan would eliminate the Estate Tax paving the way for individual’s to leave an unlimited amount to their heirs without being subject to federal tax.

 

Net Investment Tax

The Net Investment Tax is imposed at a rate of 3.8% on certain net investment income (i.e. interest, dividends, capital gains, rental/royalty income, non-qualified annuities, and businesses that are passive activities to the taxpayer. The tax is imposed on individuals and estates/trusts that have income above the statutory threshold amounts. Individuals will owe tax if their Net Investment Income and Modified Adjusted Gross Income (MAGI) exceed the following thresholds: Mr. Trump’s plan would eliminate the Net Investment Tax.

Filing Status	Threshold Amount
Married filing jointly	$250,000
Married filing separately	$125,000
Single	$200,000
Head of Household	$200,000

 
 

Trump’s Tax Proposal: For Businesses

Under current law, corporate tax rates are also on a graduated scale as outlined below. These rates range from 15% to 35% based on taxable income and cover mostly large U.S. companies (i.e. C Corporations)

Taxable Income	Tax
$0 to $50,000	15%
$50,000 to $75,000	$7,500 + 25% of amount over $50,000
$75,000 to $100,000	$13,750 + 34% of amount over $75,000
$100,000 to $335,000	$22,250 + 39% of amount over $100,000
$335,000 to $10,000,000	$113,900 + 34% of amount over $335,000
$10,000,000 to $15,000,000	$3,400,000 + 35% of amount over $10,000,000
$15,000,000 to $18,333,333	$5,150,000 + 38% of amount over $15,000,000
$18,333,333 +	35%

 
Mr. Trump’s plan would effectively eliminate the current corporate tax structure and replace it with a flat corporate tax rate of 15%. This restructuring would also extend to Subchapter S corporations and partnerships that don’t pay taxes at the corporate level. Instead, these entities serve as “pass through” vehicles in that income passes through and is taxed at the individual level as ordinary income. The Trump plan would also tax the “pass through” income at 15%.
 

Author’s Note:

Please keep in mind that at this time, these individual and business tax changes are only proposed and may go through several rounds of revisions before becoming official.

 
Alloy Silverstein’s tax experts will keep you informed as information is made available and can walk you through how these projected changes may affect your specific tax situation.

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