Insight Into Trump Tax Reform Roadmap
After much anticipation, last week Republicans released their roadmap for revamping the US tax code. Passage of large scale tax reform will almost certainly be met with resistance and this is only the first step in the process but it provides some important insight into the intended direction of the upcoming debate that will take place over the next few months.
The plan outlines reduced tax rates for companies and individuals, calls for the elimination of the Federal Estate Tax and proposes some level of simplification with respect to some complex annual reporting requirements.
Specific to Individual Tax, the plan focuses on four main areas:
1. A compression of the personal Income Tax bands – The plan proposes to reduce the number of tax bands from seven to three. Currently the bands range from 10% to 39.6%. The new bands are proposed to be 12%, 25% and 35%. Alongside this shift, it is proposed that the Standard Deduction (which is claimed if individuals do not have enough deductions to itemize) would increase from the current $6,300 to $12,000 for single filers and from $12,600 to $24,000 for married joint filers.
2. The elimination of Federal Estate Tax – In line with past statements, Trump intends to repeal all Federal Estate and Generation-Skipping Transfer Taxes. Currently, Federal Estate Tax applies to estates in excess of $5.49 million per US individual. Additionally, a transfer tax currently applies to transfers made during your life or at death that skip a generation. Notably, there is no mention of the Federal Gift Tax which is applicable when transfers are made during an individual’s lifetime. It also makes no mention of whether a step-up in basis would remain applicable at an individual’s death or whether beneficiaries would inherit assets at the original cost basis.
3. The elimination of Itemized Deductions – There are currently a number of different deductions available as offset to Federal Income Tax. Under the plan outlined, almost all Itemized Deductions would be repealed except for mortgage interest relief and charitable giving. The repeal would include an elimination of benefit related to state and local taxes paid which would certainly have a large impact on individuals living in states that have high income tax rates.
4. A repeal of the Alternative Minimum Tax (AMT) – The AMT is a separate tax calculation that runs alongside the normal income tax calculation to prevent high income taxpayers from reducing their income too extensively through the use of available deductions. In this tax calculation certain types of deductions are added back to determine a minimum tax that must be payable. Under the proposal, AMT would be eliminated.
With respect to Corporation Tax, the main focus of the plan would reduce the corporate tax rate from 35% to 20% and repeal most available deductions and credits. Additionally, there would be a reduced tax rate for pass-through entities. Currently, most pass-through entities such as partnerships, S Corporations and single member LLCs pay tax at the individual level as opposed to the entity level. The plan proposes this income to be taxed at 25% and would require a classification between salary and business profit to ensure income is being taxed at the appropriate rates.
A focus of the plan would seek to change to a corporation tax based on territory. There would be an exemption for dividends received by US parent companies from its foreign subsidiaries. A transitional opportunity would be offered to allow for all previously accumulated foreign earnings to be considered repatriated.
While the proposal outlines this system for corporations, it does not indicate any reciprocation for individuals. Under the current system, all US citizens and Green Card holders are required to report worldwide income to the US tax authorities annually, regardless of where they live.
The debate will surely evolve and more detail will become available in the coming months. It will remain a space to watch and we will continue to provide additional details as and when the debate begins to take shape. In the meantime, should you have any questions at all please do not hesitate to contact your MASECO Asia Wealth Manager.