Will 2017 Finally Bring Much Needed Tax Reform for Individual Taxpayers?

By L. Michael Gracik, Jr., CPA

It is no secret to anyone that our Federal income tax system needs substantive reform and overhaul.  Keiter has long been and will continue to be a strong proponent for this much needed reform.  With the results of the recent election, a Republican President-Elect and Republican control of both houses of Congress, 2017 may be our best chance for Congress to finally make the needed changes to our income tax system.  The tax reform proposals put forth by the President-Elect and the reform proposals recently put forward by House Republicans share a lot of common ground as to the type of changes needed to reform our Federal tax system.

As we move into 2017, we will continue to monitor and keep you aware of progress on these much needed reform proposals.

Below is a summary from Thompson-Reuters of the Individual tax proposals of the President-Elect and the House Republicans:

President-Elect Trump Tax Plan for Individuals

Tax rates and breakpoints for Married-Joint filers would be:

• Less than $75,000: 12%
• More than $75,000 but less than $225,000: 25%
• More than $225,000: 33%
• Brackets for single filers would be ½ of these amounts;
• ”Low-income Americans [would] have an effective income tax rate of 0″;

• The existing capital gains rate structure (maximum rate of 20%) would be maintained, with tax brackets shown above;
• Carried interest would be taxed as ordinary income;
• The Affordable Care Act would be repealed; as part of this repeal, the 3.8% tax on investment income would be repealed;
• The alternative minimum tax (AMT) would be repealed;
• The standard deduction for joint filers would increase to $30,000, and the standard deduction for single filers would be $15,000;
• Personal exemptions would be eliminated;
• Head-of-household filing status would be eliminated;
• Itemized deductions would be capped at $200,000 for Married-Joint filers and $100,000 for Single filers;
• The estate tax would be repealed, but capital gains on property held until death and valued over $10 million would be subject to tax, with an exemption for small businesses and family farms. To prevent abuse, contributions of appreciated assets into a private charity established by the decedent or the decedent’s relatives would be disallowed;

There would be the following childcare and elder care rules:

• An above-the-line deduction for children under age 13, that would be capped at state average for age of child, and for eldercare for a dependent. The exclusion would not be available to taxpayers with total income over $500,000 for Married-Joint or $250,000 for Single;
• Rebates for childcare expenses to certain low-income taxpayers through the Earned Income Tax Credit (EITC). The rebate would be equal to 7.65% of remaining eligible childcare expenses, subject to a cap. This rebate would be available to married joint filers earning $62,400 ($31,200 for single taxpayers) or less;
• All taxpayers would be able to establish Dependent Care Savings Accounts (DCSAs) for the benefit of specific individuals, including unborn children. Total annual contributions to a DCSA would be limited to $2,000 per year from all sources. The government would provide a 50% match on parental contributions of up to $1,000 per year for these households.

Note: Currently, the Trump Tax Plan makes no mention of the gift tax.

The House Republicans’ “A Better Way” Plan

Tax rates and breakpoints for Married-Joint filers would be:

• Less than $75,000: 12%
• More than $75,000 but less than $225,000: 25%
• More than $225,000: 33%
• Brackets for single filers would be ½ of these amounts;
• “Low-income Americans [would] have an effective income tax rate of 0″;
• Allows a deduction of 50% of capital gain income resulting in lower effective capital gains tax rates;
• Eliminate the AMT;
• Consolidate a number of existing family tax benefits into a larger standard deduction and a larger child and dependent tax credit;
• Continue the EITC, but look for ways to improve it;
• Simplify tax benefits for higher education;
• Eliminate all itemized deductions except the mortgage interest deduction and charitable contribution deduction;
• Continue current tax incentives for retirement savings; and
• Repeal the estate and generation-skipping transfer taxes.

Note: Currently, the House Republicans’ plan makes no mention of the gift tax.

Proposed IRS Reform:

• “Streamline” the agency and center it on three major units: one for families and individuals, one for business, and a new “small claims court” unit that would be independent of IRS and designed to allow routine disputes to be resolved more quickly;
• Reform IRS leadership so that it is headed by an Administrator, appointed by the President with the consent and advice of the Senate for a single 3-year term;
• Have a “Service First” mission; and
• Commit to taxpayer assistance.

 Proposed Health Care Reform:

• Repeal the Affordable Care Act, including the repeal of the 3.8% NIIT (Net Investment Income Tax)
• Make the following changes to health savings accounts (HSAs): allow spouses to make catch-up contributions to the same HSA account; allow qualified medical expenses incurred before HSA-qualified coverage begins to be reimbursed from an HSA account as long as the account is established within 60 days; set the maximum contribution to an HSA at the maximum combined and allowed annual deductible and out-of-pocket expense limits; and expand accessibility for HSAs to certain groups (e.g., those who get services through the Indian Health Service and TRICARE).
• Allow certain purchasing platforms, like private exchanges, to expand. The plan would encourage the use of direct or “defined contribution” methods, such as health reimbursement accounts (HRAs).
• Encourage the portability of health insurance. Everyone would have access to financial support for an insurance plan chosen by the individual, which could be taken with them job-to-job, to non-work environments and into retirement years. For those who do not have access to job-based coverage, Medicare, or Medicaid, the proposal would provide an advanceable, refundable tax credit. The portable payment would be increased as the recipient aged.

Summary of Proposals for Individual Taxpayers

• Both the Trump and House Republicans proposals would repeal the Affordable Care Act, significantly lower tax rates on both individuals, eliminate the AMT, eliminate estate taxes, and lessen the relevance of itemized deductions.
• On the other hand, Trump puts great emphasis on new child and elder care tax breaks, and the House Republicans do not. And, the House Republicans consider many changes to existing tax rules that Trump doesn’t mention.

2017: A Year of Tax and Health Care Reform Legislation?

Given the newness of the election and its surprise results, we are pretty far from understanding the dynamics of the workings of the 115th Congress that will begin its work in January—including whether the Republicans will attempt to pass tax legislation in the Senate under the legislative process called “reconciliation” which only requires a simple majority, or will, instead, allow the Senate filibuster rules to apply to the tax legislation. Similarly, we are pretty far from understanding the push and pull between Congressional leaders and President-elect Trump. Thus, even given the large overlap between the proposal of the House Republicans and that of Mr. Trump, we have a long way to go in predicting a lot of the specifics of 2017 tax legislation. However, some significant 2017 tax legislation and some significant health care reform legislation seem quite likely.

Questions on how these changes may impact your individual tax planning?  Contact your Keiter representative or 804.747.0000 | Email.

Sources:

• https://tax.thomsonreuters.com/media-resources/news-media-resources/checkpoint-news/daily-newsstand/things-to-come-a-look-at-trumps-and-house-republicans-tax-proposals/

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As Managing Partner of Keiter, Mike oversees the Firm’s strategic plan and growth initiatives.  Mike works closely with his clients to identify tax planning and savings opportunities specific to their business and industry. His client’s include closely-held businesses in the real estate, home building, manufacturing, construction, retail and wholesale industries. He also serves many estates, trusts and foundations. Read more of Mike’s insights on our blog.