Trump's Tax Plan: What You Need To Know

By Hightower Great Lakes on May 8, 2017

If you’ve been connected to any media outlets, especially related to politics, then I’m sure you have heard of the new developments by the Trump Administration to overhaul the tax code. On Wednesday, April 26, Secretary of the Treasury Steve Mnuchin announced an outline for the proposed tax plan. I’m here to help you understand the details and point out the key takeaways. However, there’s one thing to keep in mind, this is just the beginning of what could be a long arduous process in establishing and passing a bill that both sides of the aisle are willing to accept.

Individuals

Let’s start with individual taxes. Currently there are 7 tax brackets starting at 10% and ending at 39.6%. Trump is looking to simplify the brackets by reducing them to 3 brackets, starting at 10%, implementing one middle bracket at 25% and ending with the top bracket at 35%. This shaves almost 5% of tax off of the highest earners in our tax system. The big question here is what income thresholds will be for these brackets.
Next, there is a 3.8% investment income tax, in which he has plans on repealing. The 3.8% surcharge on investment income was a piece of the Affordable Care Act, so they will obviously look to rid of that.
Perhaps the biggest change they are discussing comes with individual deductions. Currently, when you file taxes, you have the ability to choose between the standard deduction (For 2017, if married – $12,700, Single – $6,350) and itemized deductions (medical expenses + mortgage interest + real estate taxes + state/local income taxes + charitable contributions + other miscellaneous expenses related to employment, tax preparation and investment fees). In general, individuals who are higher earners with a reasonable mortgage will most likely be itemizing deductions. Trump’s plan looks to double the standard deduction ($25,400). This is an excellent advantage to those who already use the standard, but not so much for the individuals who itemize.
They are also looking at slashing some of the itemized deductions that wealthier individuals often rely on as a large part of reducing their tax burden. One of the biggest hits would be the deduction of state taxes as well as property tax deductions (they were very unclear about property taxes). With ridding of these 2 deductions alone, you could effectively increase the tax burden for someone currently claiming them. Professionals in the mortgage lending and real estate industry would be especially impacted by this, as the financial benefits of homeownership could look less appealing.
Those are key highlights of Trumps plan related to personal income taxes. Now let’s briefly touch on the business side.

Businesses

When talking about business taxes, I am primarily concerned and focused on small to midsize businesses. Corporations currently pay a tax rate of 34% or higher if it earns over $100k per year. Trump is currently looking to replacing this tax rate with a flat 15%. Not only would this apply to your standard corporation but it would apply to “pass-through entities”, which include S Corporations, Partnerships, LLC’s and Sole Proprietorships. Generally, pass-through entities carry the net income and other tax benefits such as credits and 179 expenses to the owner’s personal tax return, which then gets taxed at their personal rate, which we covered earlier. This could provide a HUGE advantage for small business owners who earn the majority of their income through pass-throughs. As a former IRS agent I begin to think what kind of problems this may cause with administering this new policy. For someone that’s a high wage earner it could potentially make sense to convert into a self-employed individual whether it is through an S corporation, LLC or sole proprietorship to take advantage of the 15% tax rates. Should this get passed, this surely will be a priority for the Treasury. Our adviser team has been keeping a close eye on any new developments with his tax plan and we will be sure to keep you updated. Stay tuned for my next blog as I continue covering Trump’s tax plan and any new progress surrounding it.
 
For more details or assistance with anything, please reach out to me or the Scannell Wealth Management Team at (219) 476-4941 or visit our website at www.scannellwealth.com.
 
John M. Lauer, CPA, MST
Wealth Advisor

(John is a licensed Certified Public Accountant (IL and IN) and has a professional tax knowledge, including public accounting experience and experience as a Global High Wealth IRS Auditor)

Your goals and dreams change. Financial products do not. Clients work with us because we don’t sell products – we create customized plans based on each client’s unique goals, and we continuously reevaluate client plans to ensure they are aligned with changing needs. Our clients rely on us to help protect their futures, and we take their trust to heart.

HighTower Advisors do not provide tax or legal advice. This material was not intended or written to be used or presented to any entity as tax advice or tax information. Tax laws vary based on the client’s individual circumstances and can change at any time without notice. Clients are urged to consult their tax or legal advisor before establishing a retirement plan.