Now that Donald Trump has won the Presidency and the Republicans have control of both the House and Senate, tax reform will be coming. The last major reform of the tax code was in 1986 under Ronald Reagan. Donald Trump has made tax reform a priority and he and Congress will tackle this during his first 100 days in office.
The House Republicans released a tax plan this past summer. It is more aggressive than Trump’s plan in some areas, but it also pulls back on some areas that Trump wants to change. But Trump and Congressional Republicans are in agreement that there will be tax reform for both individuals and businesses.
The individual tax rates will be compressed to three brackets: 12%, 25% and 33%. These are higher than the 10%, 20% and 25% rates Trump originally proposed. He plans to eliminate the 0.9% and 3.8% Obamacare surtaxes too. He also wants to repeal both the estate tax and the alternative minimum tax (AMT), and House Republicans are on board with this.
Trump also plans to get rid of the Head of Household filing status and the personal exemption. This has garnered some press lately, as these two items provide tax relief for single parents. To compensate, Trump plans on raising the standard deduction to $15,000 for singles and $30,000 for married couples, as well as increasing the child tax credit and allowing deductions for childcare expenses.
Congressional budget rules dictate that any tax cuts must be offset in other tax areas. With Trump’s tax plan, the tax cuts will be offset by the elimination of various long-standing tax deductions, including the deductions for medical expenses, state and local income taxes, real estate taxes and most miscellaneous itemized deductions such as employee business expenses and investment expenses. The Holy Grails of tax deductions – mortgage interest and charitable contributions – will remain.
Trump has said that he wants to repeal and replace Obamacare, but he has also said there are certain elements of it he wants to keep. Whatever happens, it does appear that any change will be transitioned in and may pose a problem if Congress eliminates the surtaxes used to pay for the program.
Trump’s tax plan for corporate tax reform is more aggressive than what House Republicans would like to see. Trump wants to lower the top corporate tax rate from 35% to 15%, and he wants the 15% rate to apply to LLCs, S-Corporations and self-employed individuals. The House GOP plan calls for the top corporate tax rate to be 20% and the rate for LLCs, S-Corporations and self-employed individuals to be 25%.
To pay for the business tax cuts, certain business deductions will be eliminated as well as levying a one-time tax between 8.75% and 14% on previously untaxed income held overseas by U.S. multinational corporations. This tax will then allow these companies to bring that money back to the United States without paying tax a second time.
When will all this happen?
The Democratic lawmakers will fight these changes hard. They are concerned about tax cuts for the wealthy as well as the lost revenue from the cuts, which is estimated to be $6 trillion over the next ten years.
Tax reform of this magnitude usually takes some time to implement, so it could be up to a year before these changes take effect. One things bears watching though: The Republicans don’t have enough votes to stop a Democratic filibuster in the Senate, so the tax changes will most likely get passed under the budget reconciliation rules, which only require a simple majority in the Senate to pass and not a 60-vote supermajority. Using budget reconciliation to pass tax cuts isn’t impossible – it has been used 20 times since 1980, including twice for the Bush tax cuts in 2001 and 2003 and in 2010 to pass the Affordable Care Act – but it can be tricky.
There is no doubt that tax changes will be coming, it is just a matter of when and not if.
There were tax initiatives on a number of state ballots this past election. The winners included tax increases for high-income individuals in Maine and California, and soda taxes in four cities (San Francisco, Oakland, Albany, CA and Boulder, CO). Rejected initiatives included a corporate tax hike for large companies in Oregon and a carbon emissions tax in Washington.