By Kevin M. Hedley, MS, CPA, PFS
As is often quoted “Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.” (Benjamin Franklin, 1789)
With that said, this year is certainly no different. The uncertain part is of course how much if at all our taxes will change this year with a new administration.
President Trump has discussed some new personal tax rates. His suggested tax rates and breakpoints for married-joint filers would be: Less than $75,000, 12 percent; more than $75,000 but less than $225,000, 25 percent; and more than $225,000, 33 percent. Brackets for single filers would be half of these amounts. These three rate brackets would replace our current seven rate brackets which go as high as 39.6 percent.
In addition to the changes in rates he has also called for some other drastic changes including, but not limited to: the Affordable Care Act, 3.8 percent tax on investment income would be repealed; the alternative minimum tax (AMT) would be repealed; the standard deduction for joint filers would increase to $30,000 and the standard deduction for single filers would be $15,000; Personal exemptions would be eliminated; head-of-household filing status would be eliminated; itemized deductions would be capped at $200,000 for married-joint filers and $100,000 for a single filer; standard corporate tax rate would be reduced to 15 percent from the current 35 percent.
This past year both Chairman Kevin Brady of the House Ways and Means Committee and Speaker of the House Paul Ryan put forth some changes the Republicans in Congress would like to see, among the Congressional leaders’ tax provisions: Reduce both the top rate to 33 percent and the number of brackets to three; reduce tax rates on investment income; repeal AMT; consolidate a number of existing family tax benefits into a larger standard deduction and a larger child and dependent tax credit; eliminate all itemized deductions except the mortgage interest deduction and charitable contribution deduction; repeal the estate and generation-skipping transfer taxes. (The Congressional plan makes no mention of the gift tax.)
Business tax provisions in the Congressional plan include: creating a new business rate for small businesses that are organized as sole proprietorships or pass-through entities; reducing the corporate tax rate to 20 percent; providing for immediate expensing of the cost of business investments; allowing interest expense to be deducted only against interest income; moving toward a consumption-based tax approach; and repealing the Affordable Care Act;
Of course the president and Congress will need to work together on these items in order to change the law. Republicans control Congress, but their majority is thin and their ability to change the laws is still not without obstacles.
Both the Trump and House Republicans proposals have some consistencies as can be seen above but they do differ on other aspects of their changes in the law.
The new president puts great emphasis on new child and elder care tax breaks, and the House Republicans do not have the same emphasis. House Republicans discuss changes to other tax rules that Trump doesn’t, at least not any longer. The House Republicans plan contains, a special tax rate for income from businesses that operate as pass-through entities. The current Trump website no longer mentions such a proposal.
Another area of disagreement is dealing with our borders via taxes, levies and tariffs. President Trump wants firms that outsource work and jobs to pay a tariff on imports. Republicans in Congress have a different, perhaps more complex idea, called a border adjustment.
The president would impose a penalty in the form of a tax at the border. The tariff/levy/tax, which could be as high as 35 percent, would apply to firms that import goods to the United States.
A border adjustment would see the cost of imported parts or finished goods for use or sale in the United States would no longer be deductible for tax purposes, while revenue from exports would be excluded from taxable income. In a recent interview with the Wall Street Journal, Trump stated that such a system is too complicated.
If the border adjustment were to become law, companies would have to rethink their tax strategies based on evaluating a tax cut versus the higher cost of imports which would no longer be deductible. There’s also a debate over whether it would violate World Trade Organization (WTO) rules. Also, such a tariff could have a negative impact on trade if other countries decide to follow suit with tariffs. Such a debate is beyond the scope of this article
Retailers selling imported products say the border-adjusted tax would increase their costs because they would essentially be taxed on something close to their revenue, not just their profit.
Conversely, big exporters could benefit, and purely domestic U.S. companies, who neither import nor export, would gain simply from the lower tax rates.
Hedley is a partner with Hedley & Co. PLLC.