LOOKING AHEAD TO POTENTIAL 2017 TAX LAW CHANGES
The election on November 08, 2016 of Donald J. Trump as the 45th President of the United States brings with it anticipated changes to current tax laws for both individuals and businesses. President-elect Trump made tax reform a centerpiece of his economic planning. Among various proposals were lower and condensed individual income tax rates, lower business tax rates, repeal of the Affordable Care Act, education and child care tax breaks for families and repatriation of overseas corporate profits.It is unclear at this time which, if any, of the possible changes would be retroactive to January 01, 2017.
President-elect Trump issued a “100 Day Plan” which included a number of tax proposals to be worked on with Congress -
Reduce tax rates on ordinary income to 12, 25 and 33 percent [current rates top-out at 39.6 percent]
Standard deduction would increase to $15,000 for single individuals [$30,000 married couples filing jointly][current standard deduction is $6,350 and $12,700 respectively]
Implement a cap on itemized deductions that can be claimed for taxpayers over a certain level of adjusted gross income - $100,000 for singlwe filers and $200,000 for married taxpayers filing jointly. No specific cap has been proposed at this time.[Current law phases out a portion of certain itemized deductions for certain high income taxpayers based on a percentage of income over specified levels of adjusted gross income.]
Repeal the 3.8% net investment tax (NIT) on passive income, including capital gains.
Repeal the federal estate and gift tax. [Current unified estate and gift tax regulations provide a $5.49 million exemption from tax only.]
Disallow “stepped up basis” on assets included in estates exceeding $10 million. [Current law provides a “stepped up basis” on assets included in all estates.]
Eliminate the alternative minimum tax (AMT).
Repeal the 3.8% net investment tax (NIT) through repeal of the Affordable Care Act.
Create a new child and dependent care expense deduction for working families currently not qualifying for the child and dependent care credit. The deduction would be implemented with “spending rebates” for low income taxpayers through the earned income tax credit (EITC), or as an above the line deduction for qualified taxpayers up to certain thresholds.
Create a Dependent Care Savings Account (DCSA) which would be a tax-favored savings account for children, including unborn children, and dependent care expenses matched with government contributions. The savings accounts would have annual contribution limits.
Eliminate the carried interest preferential tax treatment and tax carried interest at ordinary tax rates. [Current law allows investment managers to received management fees in the form of an interest in the managed investment and receive capital gain treatment of otherwise ordinary taxable income.]
Reduce current top corporate income tax rate from 35% to 15%.
Eliminate the corporate alternative minimum tax (AMT).
Election by owners of small businesses which are taxed at the individual income tax rates to be taxed at a flat rate of 15% (to mirror the proposed lower corporate income tax rate).
Unspecified “corporate tax expenditures” would be eliminated other than the Research and Development (R&D) tax credit.
Increase the IRC Section 179 expense deduction from the current $500,000 cap to $1 million.
Eliminating the interest expense deduction.
Immediate tax deduction of all property and equipment purchases.
Allow a one-time reduced tax rate for the repatriation of off-shore profits.
”PROTECTING AMERICANS FROM TAX HIKES ACT OF 2015” (PATH Act)
On Friday, December 18, 2015 the United States House of Representatives and United States Senate passed the Protecting Americans from Tax Hikes Act of 2015 (PATH Act)(HR577), which included the both permanent and temporary extensions of various tax provisions that had expired at the end of 2014, as part of a omnibus spending package.
Some of the more common extensions included in the Act are -
INDIVIDUAL TAX EXTENDERS
State and Local Sales Tax Deduction - The election to claim an itemized deduction for state and local sales tax in lieu of state and local individual income tax.
”American Opportunity Tax Credit” - The $2,500 American Opportunity Tax Credit (AOTC). Phase of the credit continues for taxpayers with modified adjusted gross income between $80,000 and $90,000 and $160,000 and $180,000 for joint filers
Teachers’ Classroom Expenses Deduction - The $250 (indexed for inflation beginning in 2016) above-the-line (in calculating adjusted gross income) deduction for qualified expenses incurred by primary and secondary professionals, reduced by reimbursements from the taxpayers’ employer. The Act now includes “professional development expenses” (courses related to the curriculum in which the educator provides instruction) in the deduction.
Charitable Distributions from IRAs - The provision for individuals age 70 1/2 and older to make tax-free distributions from individual retirement accounts (IRA) for charitable donations. This treatment is limited to $100,000 per taxpayer.
TWO-YEAR (through 2016) EXTENSIONS
Qualified Tuition/Related-Expenses Deduction - The above-the-line (in calculating adjusted gross income) deduction for qualified tuition and fees.
Mortgage Debt Exclusion - The Act excludes from income up to $2 million of cancelled principal residence mortgage debt.
Enhanced Child Tax Credit - Sets the refundable child tax credit earned income threshold dollar amount at $3,000 (un-indexed for inflation).
Mortgage Insurance Premium Deduction - The itemized deduction for mortgage insurance premiums. These premiums are treated as deductible qualified residence interest.
BUSINESS TAX EXTENDERS
Code Sec. 179 Expense Deduction - The $500,000 Sec. 179 expense deduction and $2,000,000 overall investment limit. Both amounts will be indexed for inflation beginning in 2016. The Code Sec. 179 expensing for qualified real property was also extended, removing the $250,000 cap beginning in 2016.
Research and Development Tax Credit - The research and development tax credit (R&D).
Gain on Sale of Qualified Small Business Stock - The 100% exclusion of gain from the sale or exchange of qualified small business stock held for more than five years by non-corporate taxpayers.
S-corporation Built-In Gains Tax Recognition Period - The five-year holding period for holding assets following conversion from a C corporation
FIVE-YEAR (through 2019) EXTENSIONS
Bonus Depreciation - The 50% additional first-year depreciation deduction has been extended through 2017, phased down to 40% in 2018 and 30% in 2019. Qualified property must be depreciable under MACRS and have a recovery period of 20 years or less.
Work Opportunity Tax Credit - The credit relates to wages paid by employers who hire individual from certain targeted groups of hard-to-employ individuals (e.g. qualified IV-A recipient, qualified veteran, qualified ex-felon, qualified summer youth employee).
Energy Extenders - There are many extended energy provisions for both individuals and businesses. The most prominent might be the extension of the Code Sec. 25C Residential Energy Property Tax Credit.
Affordable Care Act (ACA) - The PATH Act made several modifications to the ACA - (i) delays for two-years the excise tax on high-dollar health care plans (“Cadillac “ plans. The excise tax will also be deductible from income tax; (ii) a one-year moratorium on the ACA health insurance provided fee; (iii) two-year moratorium (2016 and 2017) on the 2.3% medical device excise tax.
Code Sec. 529 Plans - The purchase of computer equipment and technology is permanently considered a qualified expense. The Act also removes certain distribution aggregation requirements and allows redeposit of Sec. 529 funds without penalty in certain circumstances when tuition is refunded.