Today, Pres. Trump unveiled the general outline for his new tax plan. Yes, to my great amazement, he is talking about simplification of the Internal Revenue Code. I do not know if Congress will let this happen, but the compliance cost of federal and state taxes is far too high and has become a large impediment on business growth in the economy in general.
One way that simplification is being proposed is that there would be a reduction in the current seven tax brackets 23 tax brackets of 35%, 25% and 10%. Also itemize deductions, other than charitable donations and mortgage payments, would be eliminated. This means that medical deductions, state and local tax deductions, casualty and theft losses, and unreimbursed employee business expenses would be eliminated. As part of the simplification, there would be an elimination of the estate tax at the federal level. Although that would affect only a small amount of estates, it would eliminate tax planning for everyone’s estate.
Another important change would be the elimination of the alternative minimum tax. This sneaky tax hurts people who sell businesses, a vacation home, or make some type of capital gain, as well as the two income household. Right now over 5 million people suffer from the alternative minimum tax and the result would be a much simpler tax system and eliminate the need for some complicated tax maneuvers by individuals.
On the business side, the corporate tax rate would be reduced from the current rate of 35% to 15%. This would also apply for pass-through businesses such as limited liability companies. If you own your own business, you would be tax at the 15% rate rather than the higher individual rate. Note, however, the business owner still would have to pay self-employment tax which is both sides of Social Security and Medicare tax.
There is a proposed increase in the standard deduction from 12,700 for joint filers to $25,400. This would eliminate the issue caused by the repeal of itemized tax deductions. Also, the 3.8% Obama tax on net investment income would be repealed.
The real question is whether or not Congress will follow through with real tax reform rather than doing piecemeal tweaking of the Internal Revenue Code. Stay tuned!