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Key Factors of Pending Tax Reform


On January 20, 2017, Donald J. Trump became the 45th President of the United States. As such, one of his stated goals is cutting taxes by a total of $6.2 trillion. Many are still wondering what this tax reform will look like and when it will take effect.  While the specifics are not yet available, there are several indicators of what may be to come.

Timing of the Bill:

House Speaker Paul Ryan (R – WI) has publicly set a goal of introducing a bill by the end of April and getting it passed in August – before the summer recess. However, there will likely be obstacles that delay the House vote until early next fiscal year, which begins in October.

The overriding goal of tax reform under President Trump’s administration will be to lower both individual and business tax rates, in addition to changing deductions. He also intends to repeal and replace the Affordable Care Act (“ACA”) – although his initial attempts have been unsuccessful.

Despite expected efforts to oppose a tax reform bill this year, a bill is expected before the end of 2017 and this could mean significant changes and savings for both individual and business taxpayers.

President Trump’s Plan:

Under the plan proposed by President Trump, a number of tax brackets will be eliminated and the highest marginal tax rates lowered. This means the highest rate for individuals would go from 39.6% to 33% and the current seven tax brackets will be reduced to three. Additionally, President Trump plans to eliminate the Net Investment Income Tax (Part of the ACA) of 3.8%, the Alternative Minimum Tax (AMT) and the Estate Tax. Corporations, including S-Corporations, and Partnerships will also benefit from tax cuts, with the maximum tax rate dropping to 15%.

President Trump has also proposed eliminating itemized deductions in excess of $100,000 for single taxpayers and $200,000 for married taxpayers. To offset the impact, this plan will increase the standard deduction to $15,000 for single taxpayers and $30,000 for married taxpayers. The goal is to increase the number of people taking the standard deduction.

House Blueprint:

Paul Ryan has been a major proponent of the Blueprint for Tax Reform, which was introduced by the House Ways and Means Republicans in June of 2016. While this plan is similar to the President’s, there are several key differences.

The House Blueprint will adhere to the same tax rates and brackets as the Trump plan and would also eliminate the ACA tax, the Alternative Minimum Tax, the estate tax and most itemized deductions. However, the standard deduction would be increased to $12,000 for single taxpayers and $24,000 for married taxpayers.

Additionally, unlike the Trump plan, businesses would be subject to tax rates dependent on entity type. Partnership and S-Corporation related income would be taxed a maximum rate of 25%, but only if the entity pays owners a “reasonable compensation,” the definition of which has yet to be published. C-Corporations would be subject to a top tax rate of 20% and allowed to expense capital investments fully

Tax Planning for 2017:

While passing a tax reform bill is likely to take several months, do not be surprised if major changes come before your tax return is due in 2018. Both proposals indicate tax rates will be reduced for individuals and businesses, but some deductions will be decreased or eliminated altogether. While both plans have similar elements, it is important to note their differences and understand the impact they could have on you or your business.

Berntson Porter will continue to monitor Congress and President Trump in the coming months as tax reform comes closer to being implemented so we can keep you informed of any changes that may affect your company and your family.