In banking I have spent the better part of the last 18 years analyzing business and personal tax returns, taking classes and obtaining certificates that qualify me to understand different business entities, tax structures, sources and uses of income and legal tax avoidance strategies. I am not a CPA and not qualified to give tax advice, but I can recommend what kinds of things you might discuss with your qualified tax adviser.
The first and most exciting part of the Trump Tax Plan is a reduction in corporate tax rates from 35% to 20%, a permanent 15% reduction to your corporate tax rate. That sounds awesome, right? But who does this benefit?
According to the Brookings Institute “Of the 26 million businesses in 2014, 95 percent were pass-throughs, while only 5 percent were C-corporations.” C-Corps are made up primarily of publicly traded companies with a board of directors and shareholders. If they report more than $75,000 in net profit (after expenses and deductions), they are subject to some of the highest income tax rates out there around 35%.
However, 95% of US businesses are pass-through businesses and are not subject to the corporate rate and will not benefit from a corporate income tax reduction. Pass-throughs are taxed on the portion of income they “pass through” to owners, partners, or shareholders personal income tax returns.
There is a proposal to cap the amount of tax allowed on pass through income at 25%. Under the proposed plan the personal bracket above 25% would apply to individuals making more than $200,000 and married couples making more than $260,000. So again capping pass through income taxes only benefits filers making more than $200,000 at the lowest end of those scenarios. What makes this harder to get excited about is that certain types of businesses would not qualify for a reduction depending on the interpretation of “service business” (accountants, lawyers, doctors, consultants, etc.).
The second thing I was excited about was the increase in the standard deduction. Currently married filing jointly is at $12,700, and single at $6350. Under the proposal, those rates would go to $24,000 married filing jointly and $12,000 for single filers. This is great news by itself, and something I was really looking forward to.
However, the exemption deduction is proposed to be erased. Currently the personal exemption reduction is $4050 per exemption claimed. You can claim yourself, a spouse if filing jointly and any dependent children. For a family of four, that is $16,200 in deductions they can claim. For single filers with no children who can now have a $12,000 deduction vs. $6350, they will stand to gain in this aspect. For that family of four married filing jointly, their $24,000 standard deduction is less than the $28,900 ($12,700 + $16,200) they’d have with the exemption in place.
The idea to moderate this is an increase in the child tax credit. In this proposal is to increase by $600 from $1,000 to $1600 per child. This has no effect on the childless single filer, but for single parents could be a net gain. For a married couple with two kids, this partially closes the gap by adding $1200, but again does not make up for the elimination of the personal exemption deduction.
The other big provision I see is the elimination of the estate tax. The estate tax is designed to avoid inter-generational accumulation of wealth. Currently you are only subject to an estate tax if the estate is estimated to be worth over $5.8 million. There are many ways for the wealthy to avoid this provision through the use of insurance and trusts and careful planning.
Several other deduction eliminations worth covering are student loan interest and medical expenses. The proposed bill eliminates student loan interest as a deduction. This seems like a strange provision at a time when student loan debt is at an all-time high. Perhaps this is meant as a disincentive to borrow for school, but will hit people with the highest levels of student debt the hardest. The other deduction is the medical expense deduction. This applies to people who can document they have spent more than 10% of their modified AGI on medical care. As medical care costs continue to rise this will impact more and more Americans. I’m trying to see this as an incentive not to use medical services, but someone with a major surgery, or chronic condition, cancer or any acute need will probably fall into this category, and will miss this deduction.
These are the high points that I can find in my research from the various sources linked here including the Brookings Institute, Business Insider, the Bradford Tax Institute, and a few others including news sources like Fox News, CNBC, CNN, New York Times, Washington Post, and Forbes. If you want to take a crack at analysis, here’s the full text of the bill in it’s latest proposed form.
What I see is a reduction in taxes for single filers, high income filers and large corporations. It appears to penalize families with 2 or more children and people with high student debt or medical expenses that are in the middle class.