President Trump’s recently released one-page tax reform proposal, linked here from the Journal of Accountancy, suggests sweeping changes to current tax codes intended to “grow the economy and create millions of jobs.” From dramatic simplifications of income tax brackets to a possible repeal of the estate tax, these shifts could have major implications for you and your business.
While an overview of proposed changes can help clarify how proposed reforms may affect your personal and corporate tax responsibilities, it’s best to speak with an experienced accountant who is familiar with your specific goals. Working with a Long Island CPA with a thorough understanding of federal, state, and local tax law is vital to preserving your wealth and building capital for new growth.
– Simplified Income Tax Brackets
The cornerstone of the Trump tax reform plan is a streamlined set of income tax brackets. The simplified proposal calls for the current seven brackets to be condensed into three, with divisions at 10 percent, 25 percent, and 35 percent. This means those in the uppermost income tax bracket would pay less than the current maximum tax rate of 39.5 percent, and those in the lowest bracket would see their taxes decrease from the current 12 percent rate.
– Standard Income Tax Deductions to Grow
Another key change is a significant increase to allowable standard income tax deductions. In 2016, individuals could apply a $6,350 deduction, while married couples filing jointly could claim a $12,700 deduction from taxable income. The president’s proposed plan doubles these deductions to ease the burden on taxpayers who opt not to itemize. Like the tax bracket reduction, the move is meant to simplify tax preparation.
– Tax Repeals
The plan also targets two current tax plans for repeal: the estate tax and the Alternative Minimum Tax (AMT). The AMT is applied to income above a certain threshold and affects wealthier taxpayers; under the Trump reform plan, this tax system would be dismantled altogether. For property owners with real estate in high-value locales such as New York, Illinois, and California, a change to the AMT could have far-reaching implications for mortgage interest deductions.
– No State Tax Deductibles
Under the current tax system, state and local taxes owed can be deducted from federal tax. The proposed plan would eliminate these income tax deductions. In some states, including New York, state taxes comprise a significant deduction, and working with a knowledgeable local CPA could become even more important to ensuring compliance without overpaying.
– Lower Corporate Taxes
The largest cut to taxes is for businesses rather than individuals as the Trump tax reform calls for lowering corporate taxes from 35 percent to 15 percent. While this significant shift would reduce corporate tax revenue by an estimated $2 trillion over the next decade, the plan is also intended to stimulate sufficient economic growth to offset losses.
– Pass-Through Income
For certain business types, including LLCs and S-corporations, pass-through income rates are currently at the same 39.5 percent as the uppermost personal income tax bracket. Under the proposed tax reforms, pass-through income would be subject to the corporate tax rate of 15 percent. For business owners and sole proprietors, this change could have a major impact on income allocation and distribution. While the general trend of tax reforms is to simplify, this element adds a new level of complexity that CPA services can help you navigate.
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