Chartered Tax Advisers & Accountants

A New President – What Does It Mean For US Tax Rates?

Published On: 09 November 2016
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So the US now has a new President-elect with the plan to, “Make America Great Again”.  Part of this will include his tax reform plan and with the Republicans retaining control of both Congress and the Senate these plans could well be implemented with minimal change.  Briefly the tax reform plan sets out the following:

Rates of Income Tax A simplification of the tax brackets system is expected in order to consolidate the brackets to 0%, 12%, 25% and 33%.  It is also anticipated that the head of household filing status will be abolished. The aim is that it will reduce the level of income tax payable by most individuals and based on the proposals it will certainly do that for those currently in the higher tax brackets of 35% and       

The proposed new rates are as follows:

 

Ordinary Income Rate

Capital Gains Rate

Single Filers

Married Joint Filers

12%

0%

$ 0 to $37,500

$0 to $75,000

25%

15%

$37,500 to $112,500

$75,001 to $225,000

33%

20%

$112,500 +

$225,000

 

Deductions - It is proposed that single taxpayers earning less than $15,000, or those married filing jointly earning less than $30,000, will not pay any income tax, as the standard deduction amounts are expected to increase to these figures.  On the flip side, it has been proposed that the personal exemption, currently $4,050, will be abolished following this increase in the standard deduction.

Itemized deductions are expected to be capped at $100,000 and $200,000 for single and married filing jointly filers respectively.

Childcare Savings – To help families it has been proposed that childcare costs could be deducted from adjusted gross income for most up to the average cost of childcare within that State.  There would be a phase out for this deduction depending on income levels.  However it is unlikely that there will be deduction available to those living out with the US.

Abolishments – The Net Investment Income Tax and Alternative Minimum Tax are expected to be scrapped.  Federal estate taxes and gift taxes may also be eliminated altogether although it would not be possible to have a step up in basis for estates over $10 million.

Business Tax – It is proposed that corporate rates of tax will be reduced to 15% from 35%.  How this will impact the taxation of pass through entities is yet to be seen or whether this lower rate will only be available to traditional C corporations.  LLC profits are expected to continue to be taxed at the normal rates of income tax for individuals and will therefore benefit from the reduced tax brackets noted above.

Summary – If these proposals are confirmed it does mean significant tax cuts are on their way.  For those planning gifts or estate planning, there seems little doubt that it will be worth holding on for now until full details of these changes are available.