It’s that time of the year to start thinking about taxes for 2017. So what’s new for 2017? The short answer is: nothing much – still waiting. However, I’m sure you have heard about President Trump’s proposed tax reform. What are these changes? This article will discuss some of President Trump’s proposed changes and how they affect you.
Before we start, let’s recap any tax issues that carried over from 2016 and 2017.
Section 179 and bonus depreciation are not new, but business owners should always be aware of these benefits. Section 179 expensing allows business owners to expense up to $500,000 of the cost of qualified capital assets in the year of purchase, but this limit starts to decrease if total capital assets exceed $2 million for the year and is totally eliminated if total capital purchases exceed $2.5 million.
Bonus depreciation allows business owners to write off 50 percent of the cost of new capital assets in the year it is placed in service as long as such assets meet certain criteria. The remaining cost is depreciated over its tax useful life. The bonus depreciation is 50 percent for 2017, but it is lowered to 40 percent in 2018 and 30 percent in 2019. We don’t know what will happen in 2020.
At this time, there are no major changes for individuals for 2017 as compared to 2016, other than tax brackets being adjusted for inflation and the standard deduction being increased slightly.
Now that you are all caught up, let discuss President Trump’s proposed tax reform. There is no certainty that it will get passed, but it is worth discussing. The last tax reform was done in 1986 and, with the Republican-controlled House and Senate and a Republican president, another tax reform seems likely.
But with what we’ve learned over the last couple of months, and Republicans can’t even agree among themselves on any new legislation, who knows when, or if, this tax reform will ever get done.
When I was writing this article, the Senate just rejected the revised repeal of the Affordable Care Act – better known as Obamacare. The repeal of Obamacare would have eliminated a couple of key taxes. It would have removed the individual mandate that requires individuals to have insurance or pay a penalty.
It would have also removed the 3.8 percent additional tax on investment income for individuals making more than $200,000 (more than $250,000 for married filing jointly).
Other than the repeal of Obamacare, President Trump has proposed seven key changes to the tax code.
Tax brackets will be cut from seven tiers to three. Currently, tax brackets are 10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent or 39.6 percent. President Trump’s proposed tax bracket will be 10 percent, 25 percent or 35 percent. The key to this change is the top bracket. This could translate into huge tax savings for the high-income taxpayers.
The standard deduction for individual and married filers will almost double. According to the most recent IRS data (2013 tax year), approximately 68.5 percent taxpayers use the standard deduction. The proposed standard deduction is $12,000 for individuals and $24,000 for married filing jointly.
Items that can be used as itemized deductions will be limited. Taxpayers can presently use the higher of the standard deduction or the itemized deduction. Taxpayers can deduct medical expenses, certain taxes paid, home mortgage interest, mortgage insurance premiums, investment interest, charitable donations and casualty losses.
There are other miscellaneous itemized deductions, but they are normally minimal for most taxpayers and are limited to 2 percent of adjusted gross income. Trump’s proposed itemized deductions will only consist of home mortgage interest and charitable donations. With the proposed increase in the standard deduction, itemized deduction might not matter.
Repeal of the Alternative Minimum Tax (AMT). According to the IRS, “the AMT applies to taxpayers who have certain types of income that receive favorable treatment, or who qualify for certain deductions. These tax benefits can significantly reduce the regular tax of some taxpayers with higher income.
The AMT sets a limit on the amount these benefits can be used to reduce total tax.” In other words, AMT was established to prevent wealthy taxpayers from using deductions and credits to avoid paying taxes. Therefore, wealthy taxpayers must prepare their tax returns in two ways: the regular tax and AMT.
Because the rules for these two types of tax are different, whichever produces the higher tax will be the tax owed. If repealed, this can translate to a pretty hefty tax savings for many.
Repeal of the estate tax, also known as the death tax. For 2017, the estate and gift tax exemption is $5.49 million per individual. This means any estate with value of $5.49 million or less will be tax-free. However, any excess is taxed at a top rate of 40 percent.
Estate taxes are complicated, but can be minimized with proper planning. If repealed, heirs will be responsible to pay any gains from the appreciation of assets when they sell those assets. Repealing the estate tax could translate to a large tax savings since individuals typically have a lower tax rate than the current estate tax rate.
However, for estates below the exemption amount, the potential loss of the step-up in tax basis could have a large impact.
Top capital gains tax will be 20 percent. This is really not a major change since the current long-term capital gain is already topped at 20 percent for most assets. However, gains from sale of certain types of investment like the sale of art and collectibles and sale of qualified small business stock are taxed at 28 percent.
The proposed capital tax would eliminate the 28 percent tax rate and top all long-term capital gain taxes at 20 percent.
The corporate tax rate is proposed to be lowered to 15 percent. The current corporate tax is at 35 percent and the proposed tax rate is 15 percent, a 20 percent tax savings differential.
President Trump’s proposed tax cuts are very aggressive. The non-partisan Tax Policy Center estimates federal revenue would decrease by $7.2 trillion over the first decade after its enactment. But President Trump feels these tax cuts would boost the economy, which would offset the lost revenue.
Multiple debates will be held, and its passing is uncertain. But one thing is certain: Regardless of which side of the debate you are on, we all want a quick resolution in order to plan appropriately for the future. 
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Ralph Lizardo
- Partner
- Frazer LLP
- Email Ralph Lizardo
