The Trump Tax Reform Plan - What Is and What May Be

Major tax reform enactment is a rare event, with the last occurring back in 1986 under President Ronald Reagan. As a result, current discussions could pan out to be much ado about nothing; however, with the solid majorities that Trump and the Republicans hold in both houses of Congress, there is real potential for tax reform to pass.

Timing and Certainty

The Trump administration’s goal is to get the tax changes passed and signed into law by the end of 2017. So, what should you expect from a tax bill that will likely be more than 1,000 pages long by the time it’s all over? Let’s take a look at some of the most notable changes widely impacting taxpayers and see. Note that these provisions are currently under debate and are subject to change between the writing of this article and the time the bill passes.

Prospective Provisions

• Simplify the tax bracket structure by replacing the current seven individual tax brackets (10 percent, 15 percent, 25 percent, 28 percent, 33 percent, 35 percent and 39.6 percent) with three brackets featuring rates at 12 percent, 25 percent and 35 percent
• Lower the corporate tax rate by about half from the current 39.1 percent to 20 percent
• Create a 25 percent business tax rate for certain pass-through entities’ (S Corporations, LLCs, etc.) business income in lieu of this income being taxed as ordinary income at the individual tax payer level
• Create a territorial tax system for companies conducting business internationally, along with enacting a one-time mandatory repatriation tax
• Estate tax repeal
• Eliminate most itemized deductions and personal exemptions
• Repeal the alternative minimum tax (commonly referred to as the AMT)

401(k) Tax Deductibility Changes

In addition to these proposals, there is one particularly contentious change on the docket that impacts the tax deduction related to 401(k) plans, being referred to as Rothification. Rothification essentially turns your current 401(k) into a Roth 401(k) by limiting pre-tax contributions to $2,400 versus the current limits of $18,000 ($24,000 if you are 50 and older). Plan participants are still allowed to save on an after tax basis up to the old limits.

Looking at the numbers, say you currently contribute $10,000 per year into your 401(k) plan and are in the 25 percent federal and 5 percent state tax brackets. Assuming your entire contribution amount falls within these marginal tax rates, you save $3,000 per year in taxes. Under the new proposals, you would only save $720, or a difference of $2,280 (assuming your marginal tax rates are not impacted).

Trump recently tweeted that there will not be any changes to 401(k) deductions; however, it was originally in the plan and could come back into play. Employers are concerned that this will discourage savings and Wall Street is terrified because managing 401(k) assets is big business.

Conclusion

The sheer magnitude of the proposed tax overhaul along with the contentious political environment means that exactly what, if anything, comes out of the administration’s plan is uncertain. Major changes could happen, so you’ll want to work with your tax advisor to navigate any new rules.

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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