From the Desk of Michael T. McCormick
President Trump’s New Tax Proposal
President Trump outlined his new tax proposal on Wednesday that the Administration intends to submit to Congress. “Today we are putting out core principles,” Treasury Secretary Steven Mnunchin told reporters. According to Wolters Kluwer News Services, Mnunchin and National Economic Council Director, Gary Cohn, said that the proposals, which include reducing individual and businesses taxes, along with abolishing the federal estate tax, the alternative minimum tax (AMT) and net investment income (NII) tax, would be fleshed-out in coming weeks.
For individuals, the White House proposed consolidating and reducing the tax rates to 10, 25 and 35 percent. Cohn said that no income brackets have yet been developed for the proposed lower rates. The proposal also calls for doubling the standard deduction. “Married couples would have a $24,000 standard deduction,” Cohn said. He predicted that doubling the standard deduction would simplify tax filing for millions of Americans.
Along with repealing the federal estate tax, the AMT and the NII tax, the proposal calls for abolishing nearly all individual credits and deductions. “The plan eliminates all individual deductions except mortgage interest and charitable deductions,” Mnunchin said. The plan also calls for unspecific tax relief for families with child and dependent care expenses.
The White House plan apparently keeps the current framework for capital gains and dividend taxes. However, it would repeal the 3.8-percent NII tax. “The President looks at [the NII tax] as being a tax on capital,” Cohn said.
During the campaign, President Trump proposed to reduce the corporate tax rate and cut taxes on small businesses. The plan does both, Cohn and Mnunchin said. The corporate tax rate would fall to 15 percent. “Small and mid-size businesses will be eligible for the 15-percent rate,” Mnuchin said, referring to partnerships, S corporations and sole proprietorships in which income is currently passed through to their owners at individual income tax rates. “We will make sure that there are mechanisms in place to prevent wealthy people from taking advantage of the rules for small businesses,” he added.
The proposal would also move the U.S. to a territorial tax regime. “A territorial system means U.S. companies will pay tax on income related to the U.S.,” Mnunchin said. “U.S. companies will not be subject to worldwide income,” he added.
Not included in the proposal is so-called border adjustability. House Republicans have promoted a border adjustment tax as a way to pay for tax reform. Mnunchin predicted that the President’s plan would “pay for itself,” but did not elaborate how. “Lots and lots of details will go into how it will pay for itself. This will pay for itself with growth and closing loopholes,” he said.
Another business proposal would provide for a one-time, reduced tax rate on earnings repatriated to the U.S. Mnuchin did not say what the rate would be, but predicted it would be a “very competitive rate.”
“We are going to move this as fast as we can,” Mnunchin said. “We are working very closely with the House and the Senate to turn this into a bill that can be passed and the President can sign.” Mnunchin added that the White House will hold listening sessions.
“The principles outlined by the Trump administration today will serve as critical guideposts for Congress and the administration as we work together to overhaul the American tax system,” House Speaker Paul Ryan, R-Wis., Senate Majority Leader Mitch McConnell, R-Ky., and the leaders of the House and Senate tax writing committees said in a statement. “President Trump’s tax proposal does not do nearly enough for working families and small businesses in this country,” House Ways and Means Committee ranking member Richard Neal, D-Mass., said.
One potential sticking point on both sides of the aisle will be the potential cost of the tax cuts on the deficit. In responding to a question directed at that concern during the White House news conference, Mnunchin added that the plan “will pay for itself with growth and with reduction of different deductions and closing loopholes.”
Impact on McCormick Clients
If passed, these changes could have broad reaching implications for my clients. For those clients with extensive itemized deductions, they may find the Trump threshold streamlines and simplifies their returns. With others, it may actually increase their tax by eliminating some deductions in a quest for simplification. The largest impact will be those clients that have S-Corps or LLC’s. Implementing a flat 15% tax for those revenue streams could save a mint in tax and may allow opportunities to restructure some compensation arrangements to have income flow thru to these type entities. Right now, I suggest we wait to see how these proposals are received by Congress, the media and the minority party to determine what strategies to implement. In the meantime, please contact me if you have questions.