Back in October, when Trump was trailing Hillary Clinton in the polls, he released his plans for his first 100 days in office. Among other things, Donald Trump’s Contract With the American Voter included promises of middle class tax relief and simplification, investment in American energy and infrastructure, and canceling every one of President Obama’s executive actions he deemed unconstitutional -- lofty goals for his first 3 months in office. Logistically, it’s nearly impossible for Trump to accomplish these objectives in 100 days, but I think we can all sense a shake-up coming. We know Obamacare is on the chopping block, but what other tax policies are on Trump’s radar?
When considering America’s future tax policy, lawmakers will likely consider Trump’s plan alongside Speaker Paul Ryan’s A Better Way for Tax Reform plan (co-authored by Ways and Means Chair Kevin Brady). Both plans have implications for personal and corporate taxes.
On the surface, Ryan’s proposals look similar to Trump’s, but there are some key differences, too.
| Tax Brackets | Deductions | Capital Gains | Investment Income Tax | Business Taxes | |
| Trump | Reduce tax brackets from 7 to 3; income limits on brackets differ from Ryan plan | Increase standard deduction and cap itemized deductions | Adjust income limits for the 20% capital gains tax | Leave current rates in place | Lower rate on all business income to 15% |
| Ryan | Reduce tax brackets from 7 to 3; income limits on brackets differ from Trump plan | Itemized deductions virtually disappear | Restructure capital gains tax completely | Reduce the top rate depending on tax bracket | Cut corporate rate from 35% to 20%; reduce tax to 25% for small biz and partnerships |
Tax Brackets
The current system allows for seven tax brackets, with the highest rate maxing out at 39.6% for single filers earning more than $415,050 and married couples filing jointly who earn more than $466,950. Trump’s plan would trim that down to three tax rates:
- 12% for married couples filing jointly with an income below $75,000
- 25% for couples earning between $75,000 and $225,000
- 33% for couples with a combined income of more than $225,000 annually
The income thresholds are cut in half for single filers.
Ryan’s plan would also reduce the number of tax brackets from seven to three, with the same rates of 12%, 25%, and 33%. Where it differs from Trump’s plan is the income ranges at which those rates would apply. Trump, for example, would levy the 33% tax rate against single filers earning more than $112,500 and married couples filing jointly earning $225,000 or more. Under Ryan’s plan, the baseline income limits would be $190,150 and $231,450 respectively.
Deductions
As of 2016, the standard deduction was $6,300 for single filers and $12,600 for married couples filing jointly. Itemized deductions were limited for single filers with incomes of $259,400 or higher and married couples filing jointly who earn $311,300 or more. The Trump plan would raise the standard deduction for single filers to $15,000, and increase it to $30,000 for married couples who file jointly. Single taxpayers who itemize would be capped at $100,000 in deductions; married couples would be able to double that to $200,000.
Ryan’s tax plan would eliminate itemized deductions altogether with the exception of the deductions for mortgage interest and charitable donations. Additionally, the plan would raise the standard deduction for single filers to $12,000 and boost it to $24,000 for married couples filing jointly.
Capital Gains
Long-term capital gains tax applies to investments held one year or longer, and the current upper limit is 20%. That tax rate is exclusive to single filers earning more than $413,200 and married couples earning an income above $464,850.
Trump would adjust the income limits for the 20% capital gains tax rate so that it applies to single filers earning more than $112,500 and married couples reporting a combined income of $225,000 or higher.
Under Ryan’s plan, capital gains and dividends would be taxed as ordinary income, and there would be a 50% exclusion of capital gains, dividends, and interest income. This means that all three would effectively be taxed at half the ordinary income tax rates (or 6%, 12.5% and 16.5%).
Investment Income Taxes
Today, individuals pay up to 20% on their long-term capital gains and dividends, and their interest is taxed at ordinary income rates -- so, up to 39.6%.
Paul Ryan wants to change that. Under his plan investors would deduct half of their gains, dividends and interest, which would effectively reduce the top rate on that income to either 6%, 12.5%, or 16.5%, depending on the individual’s tax bracket.
Trump’s plan largely leaves the current investment income tax rates in place.
Business Tax Rates
Paul Ryan aims to cut the corporate tax rate to 20% (down from 35% today), and reduce the tax rate on small businesses and partnerships from 39.6% to 25%.
By contrast, Trump wants to lower the rate on all business income to 15%.
Conclusion
Regardless of the differences between the two plans, it seems likely that we’ll see tax cuts in 2017 and beyond. The real question is who will gain the most if the Republicans succeed in overhauling the tax code, and how overall tax strategy will change. Keep abreast of tax headlines this year. I have a feeling there will be many.
