Given that Republicans will control both the House and the Senate in 2017, they may face fewer challenges in their efforts to reform the Internal Revenue Code. President-elect Trump, during his campaign, proposed a wide range of business tax cuts, with the hope of saving business owners and middle-class taxpayers significant amounts on their taxes. Specifically, under one version of Trump’s proposed tax plan, there will be three income tax brackets, an increased standard deduction, and overall lower income tax rates for individuals and business.
Personal Income Tax Bracket Changes
There are currently seven income tax brackets under the Code, and they range from 10% to 39.6%. Under Trump’s proposed plan, there will only be three tax brackets ranging from 12%, 25% and 33%.
Individuals earning between $9,275 – $37,500 would receive about a 3% tax cut, while individuals making between $37,500 – $112,500 (after deductions) will be in the 25% bracket. Individuals with income over $112,500 will be taxed 33% after deductions. For married, joint filers, the tax rate will be 12% for income between $0 – $75,000, 25% for income between $75,000 – $225,000, and 33% for income above $225,000.
Meanwhile, Trump’s proposed standard deduction increases to $15,000 for single individuals and $30,000 for married couples. On the other hand, the personal exemption and head of household tax classification will be eliminated.
Business Tax Reform
With regard to business taxation, we all know that, the current corporate tax rate is 35%. Trump’s tax plan will drop the corporate tax rate to 15% , eliminate the corporate alternative minimum tax, and significantly reduce or eliminate many of the traditional business deductions. Furthermore, companies would now be allowed to deduct their capital equipment expenditures in full (all at once), plus much of their intellectual property and research costs. However, businesses that fully deduct these capital equipment expenditures won’t be allowed to deduct interest expenses on any debt associated with the equipment. As he stated on the campaign trail, Trump believes this change will help reduce corporate dependence on debt.
“S-Corp” and partnership “pass through” income will also be taxed at a lower rate under Trump’s proposed plan. Currently, S corporations and partnerships do not pay income taxes at their corporate level. Instead, business income is divided amongst owners and taxed based on their individual tax rates. Trump’s proposed plan would provide a unified business rate of 15%. This means S corporations and partnerships (and sole proprietorships) will be taxed at 15% in addition to individual owners. Business owners earning income will be subject to the same 15% tax rate. At first glance, this seems to be overall positive news for individual business owners who also work at/in their companies.