Trump’s Tax Principles

Following the election last November, I outlined what we could reasonably expect from the Trump administration (you can find the article here).  The article may have been a little tough to follow because I was trying to meld what Trump had said on the campaign trail and two proposals floating around the House.

At this point, the picture is a little more clear as President Trump and GOP leaders outlined their principles for tax reform in a document that can be found on Speaker Ryan’s website, which you can see here.

Here’s what we know about the plan now for individuals and families:

  1. The number of tax brackets shrinks from seven to either three or four; the framework calls for 12, 25 and 35 percent brackets, but it allows for maintaining the top bracket of 39.6 percent.  At this point, we don’t know the income break points for each bracket.
  2. The standard deduction doubles to $12,000 for individuals and $24,000 for joint filers.  Most itemized deductions are eliminated, although the framework retains tax incentives for home mortgage interest and charitable contributions.

    The state, local and real estate tax deductions will be eliminated under the framework, although there has already been some discussion that the state tax deductions will remain.  There will also be a larger child tax credit, but the personal exemption is out.

  3. Taxes for long and short term capital gains remain unchanged, as do rates for qualified dividend income and non-qualified ordinary income. Additionally, the exception for municipal income would continue.
  4. The deductions related to retirement accounts aren’t perfectly clear to me at this point.  There is language in the framework that say that the framework ‘retains tax benefits that encourage work, higher education and retirement security’ and that ‘tax reform will aim to maintain or raise retirement plan participation of workers and the resources available for retirement.’

    Despite that language, I’ve read a number of accounts that say that pre-tax deductions may go out the window in favor of after-tax contributions like contributions to a Roth IRA or Roth 401k.  If the deductions were going to stay as is, I would think that they would have been mentioned alongside the mortgage and charitable donation deductions.

    ‘Rothifying’ retirement accounts would cut the deduction but still fit the framework described above.  We’ll just have to keep our eye this one, although if you saw something that I missed, let me know.

  5. The dreaded Alternative Minimum Tax (AMT) is out along with the estate and generation skipping transfer taxes.  No word on whether assets would continue to receive a step-up in basis upon death.

There’s more for businesses, but I think I’ll save that for another day even though we have business owner clients that would apply.

As I noted last November, it’s far too early to start doing anything in response to the proposal, so don’t go out and spend your refund yet!