Whether or not you approve of Donald J. Trump as the next president of the United States, if you’re a high-income earner who would like to pay less to Uncle Sam, you’ll likely approve of what his tax plan will do for you.
Trump, who will be sworn in as the country’s 45th president on January 20, has proposed across-the-board tax cuts (more or less, because there are a few changes that would result in unfortunate increases for some of the country’s lowest wage earners). Considering the fact that Republicans retain control over both the House and the Senate, conceptually, Trump’s proposal should find favor in Congress, though there is still the question of how he plans to pay for it.
“I think Trump has a pretty unobstructed path to pushing his tax agenda forward,” says Blake Christian, a CPA and partner at Los Angeles-based accounting firm Holthouse Carlin & Van Trigt. “I do expect Congress will water things down a bit to avoid spiking the deficit. So they may push some of the tax breaks out a year or two or increase his proposed 15% business tax rates to 20% or more, which would still be applauded by business owners.”
More on all of that in a bit, but first let’s look at how the proposal as it stands would affect individual pocketbooks.
The Basics: Lower Taxes And Fewer Brackets
Trump’s plan would significantly reduce the tax burden of high-income earners. It also shrinks the number of tax brackets from seven to three, with 12%, 25% and 33% rates. The top income tax rate of 33% would apply to married couples earning $225,000 or more and single people making at least $112,500. Currently, the top rate is 39.6%, kicking in once income exceeds about $470,000 for married couples and $418,000 for single people. On top of that, effective January 2013 high-income taxpayers began paying the net-investment-income tax (NIIT), an additional 3.8% Medicare surtax on things like interest, rents, royalties and passive business income. Trump’s plan eliminates this tax, something Tony A. Rose, founding partner of Encino, Calif.-based accounting firm Rose, Snyder & Jacobs, sees as a positive step.
“The net-investment-income tax was really a considerable tax increase that nobody’s talking about, which happened with Obamacare,” Rose says. “All of my clients have been paying significantly higher taxes since it was implemented.”
The end of NIIT would also make the top rate on capital gains and dividends a true 20%.
Currently, qualified dividends and long-term capital gains (the sale of certain assets held longer than one year) are taxed at 15% for most taxpayers, while those in the 39.6% bracket pay 20% plus the 3.8% NIIT.
Overall, while Trump sold himself as a populist, his tax proposal benefits high-income earners more than those in the middle or lower brackets. The plan would reduce the average tax bill in 2017 by $2,940, increasing after-tax income by 4.1%, according to analysis by the Tax Policy Center of the Urban Institute and the Brookings Institution. But the highest-income taxpayers (0.1% of the population, or those with incomes over $3.7 million in 2016 dollars) would experience an average tax cut of nearly $1.1 million, more than 14% of after-tax income, while households in the middle would receive an average tax cut of $1,010, or 1.8% of after-tax income. The poorest households would see their taxes go down an average of $110, or 0.8% of their after-tax income.
High-income earners are also poised to benefit from Trump’s proposed cuts in business taxes and the elimination of the federal estate tax.
An Attractive Time To Die
Under current law, if you die with an estate valued at more than $5.45 million, you pay a tax of 40% on the amount over $5.45 million (so if the estate is valued at $10 million, you pay a 40% tax on $4.55 million). Trump has said he will eliminate this tax.
The opportunity to pass a valuable estate on to your heirs tax-free is a rare one. Usually it takes a George Steinbrenner level of luck. You may remember that Steinbrenner died in 2010, during a one-year lapse in the estate tax. The timing ensured that the New York Yankees franchise stayed in the Steinbrenner’s family, which saved them about $500 million that they would have otherwise had to pay Uncle Sam.
Under the president-elect’s proposal, estates wouldn’t go completely untaxed. His plan would tax the appreciation of estate assets valued at $10 million or more, but only when the beneficiary sells the assets, not immediately upon death.
Eliminating the estate tax gets rid of several economic distortions, such as the incentive to sell down assets to below the threshold for taxation, the TPC points out in its analysis. However, junking the estate tax also means the wealthy have less incentive to make charitable contributions.
Big Tax Cuts For Business
As Christian mentioned, Trump’s plan significantly reduces the tax burden for businesses. U.S. corporations currently pay tax at a rate of 38.92%, the third-highest statutory rate in the world. Estimates vary on the effective rate—the amount paid after deductions—for American corporations, because there are a range of ways to calculate it and it varies from one industry to another. One estimate from the World Bank and International Finance Corporation put the United States’ effective rate for 2014 at 27.9%.
Of course, we’ve all heard reports of corporations paying much less, so Trump’s plan would certainly simplify the current system. One proposal that Trump’s advisors have considered but not confirmed would cut the corporate rate to 15%, while eliminating most business deductions. However, businesses would be permitted to deduct the cost of asset acquisitions immediately, a big change from current law, which requires them to depreciate the cost of purchased assets over a number of years, greatly reducing the tax benefits. Those businesses that fully deduct asset costs will not be permitted to deduct interest on any borrowing, a stipulation intended to reduce corporate debt.