During the course of the presidential campaign, both Hillary Clinton and Donald Trump pledged to change aspects of U.S. tax policy.
Now that we know Donald Trump will be sworn in as the 45th President of the United States and that he'll have unified Republican control of Congress, we have greater insight into the types of tax reform policies he may pursue during his first term.
Major tax reform has traditionally occurred in the U.S. every 25-35 years. The last major tax reform occurred 30 years ago in 1986, meaning we're ripe for another overhaul of the tax code.
Even though Republicans are in control of Washington, it's still likely that the pre-election proposals we've seen from Donald Trump and congressional Republicans are unlikely to end up in law exactly in their current form. Remember: Even though Democrats are the minority party, they still have tools to block legislation. This means they'll still likely have some input into any tax reform that may be passed by Congress and signed by President Trump.
Seeing as Inauguration Day is this Friday, we thought this was the ideal time to analyze how Donald Trump's and congressional Republicans' plans are in alignment and where they differ as this will likely serve as the foundation of any tax reform we may see in 2017-2018.
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Potential Changes to Income Taxes
Today, we have seven tax brackets with marginal rates ranging from 10 percent-39.6 percent. Both Mr. Trump and congressional Republicans want to reduce the number of brackets from seven to three, with marginal tax rates of 12 percent, 25 percent and 33 percent. While there is general agreement on rates, there is some disagreement surrounding the income limits on the tax brackets. Both Mr. Trump and congressional Republicans want to repeal the 0.9 percent Medicare surcharge that was implemented to help pay for the Affordable Care Act, as well as the alternative minimum tax (AMT).
Potential Changes to Investment Taxes
During the campaign, Mr. Trump stated he wants to preserve the current investment tax regime, although he does want to repeal the 3.8 percent Net Investment Income Tax (as do congressional Republicans). Congressional Republicans have advocated for taxing investment income as ordinary income, but they would allow you to exclude 50 percent of your capital gains, dividends and interest income from your taxes.
Potential Changes to Tax Deductions
In 2017, the standard deduction for singles/couples is $6,350/$12,700. Mr. Trump would raise the standard deduction to $15,000/$30,000; congressional Republicans would increase the standard deduction slightly less than Mr. Trump to $12,000/$24,000.
Both sides would eliminate personal deductions and would scale back itemized deductions.
Congressional Republicans would eliminate all itemized deductions except for the mortgage interest and charitable contribution deductions. Mr. Trump would preserve these deductions, although he would cap total deductions to $100,000 (single) or $200,000 (married).
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Potential Changes to Estate Taxes
Both sides want to abolish the estate and gift tax. Additionally, both sides would eliminate the step-up in basis on appreciated assets held at death. Congressional Republicans would eliminate this step-up in basis on all assets, while Mr. Trump would only eliminate the step-up in basis on assets exceeding $5 million (per person) held at death.
Kevin Brady, the chairman of the House Ways and Means Committee, stated that tax reform is going to occur in 2017. While we still don't know for sure what that tax reform will ultimately look like, we can be reasonably sure that the tax landscape is going to change in the near future.
