In an interview on CNBC’s Squawk Box, Secretary of Treasury nominee Steven Mnuchin predicted that the tax code changes under President-elect Trump would be the most extensive alterations since the presidency of Ronald Reagan. Nothing has been set in stone yet, but here are the key changes to the 2017 tax law that have been forwarded by the President-elect and his staff.
Personal Income Tax Bracket Changes
For personal income taxes, Trump stated that he wants to cut the number of brackets from seven to three: 12%, 25%, and 33%. The lowest bracket contains single filers earning up to $37,500 and joint filers earning up to $75,000. The 25% bracket ranges from the top of the lower bracket to $112,500 for single filers and $225,000 for joint filing. Offsetting the overall reduction in the tax rate is a cap for itemized deductions at $100,000 for singles and $200,000 for joint filing.
When compared to the current tax law, the proposed brackets would result in tax reductions from 2% to 7% with the most gains seen for those who are currently in the 39.6% bracket in both the percentage reduction of the tax rate and actual dollars saved on their tax bills. Considering this bracket setup matches the one in the 2016 House Republican tax reform plan, there is a high likelihood of its passing once the new government is in place.
Capital Gains Tax Rate
Earnings from investments will continue to receive a preferential tax rate, but the brackets will shift to align with the new income brackets. The bottom bracket will be kept at the 0% rate that exists currently, and those in the second bracket won’t see any change from 15% either. Anyone making $112,500 to $415,050 ($225,000 to $441,000 jointly) will see a 5% increase as they shift into the third, highest tax bracket.
These numbers are marginally less likely to come about than the income tax rates. The House Republican plan increases the lower bracket to 6% and has a high-end rate of 16.5%, so you can expect to see some haggling between Trump and Congress and a final landing point somewhere between the two plans.
Removal of the Estate Tax
The 40% tax on estate assets above $5.45 million was repeatedly attacked by Trump on the campaign trail, but that doesn’t mean estate planners won’t have any taxes to contend with. While the estate tax itself would be eliminated, the assets would be taxable as income once the beneficiary sells them.
Corporate Tax Changes
One of the most pronounced of the possible changes under Trump’s tax plan is a drop in the corporate tax rate. Currently, companies face a 34% or higher tax rate on income above $75,000. Trump intends to slash this rate down to 15% and to allow all companies to benefit from the reduced rate, meaning that the smallest of businesses like partnerships, independent contractors, and S corporations may soon see significant reductions in their tax bills. The 3.8% ACA tax will also be removed. To offset the sharp decline, various corporate deductions would be eliminated.
Prepare for the 2017 Tax Law Changes Today
Overall, the potential for budget deficits will limit the extent of changes in the 2017 tax law, but you can still get ahead of the changes by contacting Fricke and Associates, CPA for a more in-depth review of current and future tax laws, tailored to your financial situation. The sooner you act, the more likely you will be to reap the rewards of the positive changes and avoid the impact of the negatives.