Inauguration Day is behind us and the Donald Trump presidency is a reality. Whether you’re pumping your fist, stifling a yawn or clutching your rosary beads, there’s little doubt that this change in leadership could bring seismic shifts to our country.
As of this writing, repealing Obamacare, tightening immigration and lowering taxes seem to be topping Trump’s to-do list. While the first two will certainly affect every American, the third item—lowering taxes—will have an immediate financial impact on everyone who files a tax return.
A big caveat: No one can anticipate what these changes to the tax law will ultimately look like, but it seems prudent to make some educated guesses, then plan accordingly. Let’s analyze some of the tax changes that Trump and the Republicans in Congress have proposed.
Cutting everybody’s tax rate
During the presidential campaign, Trump promised to reduce the number of tax brackets from seven to three. The top bracket currently pays no more than 39.6 percent of their annual income. His proposal with fewer tax brackets would lower that to 33 percent.
Here’s a summary of the proposed rate changes:
Tax owed on ordinary income
Tax owed on capital gains and dividends
|$0 to $25,000||$0 to $50,000||0%||0%|
|$25,000 to $50,000||$50,000 to $100,000||12%||0%|
|$50,000 to $150,000||$100,000 to $300,000||25%||15%|
|More than $150,000||More than $300,000||33%||20%|
Trump has also proposed changing the standard deduction to $15,000 for single taxpayers and $30,000 for married-filing-jointly taxpayers. This would be a significant increase from the current law, which has the 2017 standard deductions at $6,350 for single taxpayers and $12,700 for married-filing-jointly taxpayers.
To benefit taxpayers who don’t use the standard deduction and instead itemize, Trump has proposed implementing a cap on the amount of itemized deductions that one could claim: $100,000 for single filers and $200,000 for married-filing-jointly. Itemized deductions include mortgage interest, property taxes, medical expenses, charity and state taxes. This cap would likely only impact certain taxpayers with large amounts of state taxes paid—residents of California, New Jersey, New York and Oregon, for instance. These states happen to have the highest tax rates in the country and, coincidentally or not, happen to all be “blue” states.
Shrinking capital gains taxes
Currently, long-term capital gain and qualified dividend rates are taxed at 15 percent for all but those in the top income tax bracket. For those upper-income taxpayers, a 20 percent rate applies. Long-term capital gains are generated by the sale of an investment (such as a mutual fund) or the sale of a business or piece of real estate. Qualified dividends are typically dividends paid out by a mutual fund or a publicly traded stock.
There has been surprisingly little talk from Trump about lowering these rates. However, it seems like a natural step. Many economists believe that lowering these tax rates will energize capital investment in both businesses and the stock market.
Many practice owners in the midst of selling practices at the end of 2016 purposely delayed until early 2017.
Many veterinary practice owners who were in the midst of selling their practices at the end of 2016 purposely delayed the transaction until early 2017. These owners were betting, with very little downside, that capital gain rates would decrease in the coming year, saving them a significant amount of tax. A 5 percent decrease in capital gain rates (from 20 percent down to 15 percent) on a $1 million gain saves $50,000 in taxes.
Altering the alternative minimum tax
Trump has proposed eliminating the alternative minimum tax (AMT). The AMT is a supplemental tax that has impacted more and more taxpayers in recent years. Originally intended to prevent abuse by a handful of the very rich, AMT now captures about 5 million taxpayers in its net.
AMT is very unpopular, and eliminating the law has been a priority for several presidents. However, the problem has always been how to pay for it. AMT brings in about $35 billion a year in tax revenue—and those dollars are growing.
Axing the estate and gift tax
Eliminating the estate and gift tax is also a Trump priority. Currently no tax is due if, when you die, your estate is worth under $5.5 million (double that for married couples). If, however, your estate is valued at more than this amount, a 40 percent tax is what’s in store.
The estate tax doesn’t affect the majority of Americans, but for those whom it does, the financial impact is significant. Not to be morbid, but for those sick yet wealthy individuals who held on and expired in early 2017, the delay may have saved their heirs millions.
Eliminating Obamacare taxes
Two Medicare taxes originated with the Affordable Care Act. One was a Medicare tax on wages and self-employment income. An additional 0.9 percent Medicare tax was charged on higher income taxpayers ($200,000 or above in wages or self-employment income for individuals; $250,000 or above in wages or self-employment income for married taxpayers).
These two taxes will be first on the chopping block.
The second was a Medicare tax on investment income. This new tax of 3.8 percent was applied against net investment income for higher-income taxpayers. (Adjusted gross income of $200,000 or above for individuals; $250,000 or above for married taxpayers).
Net investment income was written to include the following categories:
> Interest income (savings, certificates of deposit, corporate bonds)
> Dividend income (stocks, mutual funds, money market)
> Rents and royalties
> Income from passive activities (rental properties, passive partnerships)
> Gains from the sale of investments (stocks, mutual funds)
> Gains from the sale of real estate were subject to this tax, but not gains from the sale of a business.
These two taxes will be the first on the chopping block. Trump and other Republicans have been itching to eliminate them for years. Not only do they directly impact the wealthy, but they also fund the conservative-hated Affordable Care Act. The ironic thing is, the government may need the income generated from these two taxes (close to $200 billion annually) to financially transition into a new healthcare system.
Satisfying small businesses
One of the more interesting proposals from Trump regards taxation of small businesses, specifically pass-through entities (S corporations, partnerships). Many veterinary practices are held as S corporations, and income from these entities “passes through” to the shareholders, and the tax is paid on their personal tax returns.
Trump has proposed that the owners of a pass-through entity could elect to be taxed at a flat 15 percent corporate rate on income retained by the business (not distributed). Income not retained by the business (paid to the shareholders as distributions) would be taxed at normal individual tax rates, with a 33 percent maximum.
The idea here is to promote reinvestment into small businesses. Encouraging owners to keep their cash in their businesses could lead to more investment into expansion, inventory and equipment.
But don’t forget!
All the above information is just guesswork. These proposals are concepts, broad strokes that need to be fleshed out and tested. It’s difficult to predict how these proposals will look once they’ve collided with Congress, business interests and that elusive and controversial notion of balancing the budget.
Only one thing’s certain: The next four years will be interesting.