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Trump vs Clinton: Tax Reform Plans

Posted by BSMG on 9 Aug 2016

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UPDATE: If you've seen the news this morning, you know that Trump made major changes to his tax plan yesterday. We wanted to bring you the latest update on the candidates tax reform plans to keep you informed.

Donald Trump (R) and Hillary Clinton (D) have released their tax reform proposals which we have received and summarized here.

As we all know, the U.S. Senate and U.S. House will have very large input into what proposals actually appear in any formal bills that are filed for consideration; and the House Ways and Means Committee and the Senate Finance Committee will weigh in with their hearings on any tax reform proposals as well. 

Whether the tax reform proposals will tilt more toward the Republican view, the Democrat view, or some compromised view will depend on who wins the Presidency and which political party controls the Senate and the House after the November 2016 elections.  No matter who wins the Presidency, personal and business tax reform will be on the agenda of the U.S. Congress in 2017.   

Read More: Top 6 Tax Advantages of Life Insurance

Here is a summary of the tax reform plans of Republican candidate Donald Trump:

Individual Income Taxes

  • Consolidates the current seven tax brackets into four brackets (0%, 12%, 25%, 33%), with a top marginal rate of 25%. The top marginal rate of 25% would be for married filers with taxable income of $300,000 and single filers with taxable income of $150,000
  • Taxes long term capital gains and qualified dividends at rates of 0%, 15%, or 20% depending on taxable income. Gains would be taxed at 0% for married filers with taxable income up to $100,000 and single filers with taxable income up to $50,000.  The top capital gain rate of 20% would be for married filers with taxable income of $300,000 and single filers with taxable income of $150,000
  • Eliminates the personal Alternative Minimum Tax
  • Eliminates the passive Investment Income Tax of 3.8% which is part of the Affordable Care Act
  • Taxes carried interest for hedge fund traders at ordinary income rates instead of capital gains and dividend rates

Business Taxes

  • Cuts the corporate income tax rate from the current top rate of 35% to a top rate of 15%
  • Enact a one-time deemed repatriation tax of 10% on all foreign corporate profits currently deferred
  • Taxes pass-through business entities (S Corps and LLCs) at a maximum personal rate of 15% on K-1 profit which is commensurate with the proposed top rate for regular C Corps

Estate Taxes

  • Eliminates the federal Estate Tax

Here is a summary of the tax reform plans of Democrat candidate Hillary Clinton:

Individual Income Taxes

  • Keeps the current seven tax brackets (10%, 15%, 25%, 28%, 33%, 35%, 39.6%) with a top marginal rate of 39.6%
  • Creates a 4% “surcharge” on high income taxpayers which effectively adds an additional marginal tax rate of 43.6% (39.6% + 4.0%) for taxable income over $5,000,000
  • Creates a 4% “surcharge” on capital gains and dividends which effectively adds an additional marginal rate of 24% (20% + 4.0%) for taxable income over $5,000,000
  • Enacts the so-called “Warren Buffet Rule” which would establish a 30% minimum tax on taxpayers with adjusted gross income (AGI) over $1,000,000. This tax would phase-in between $1,000,000 and $2,000,000 AGI
  • Caps all Form 1040 Schedule A itemized deductions at a tax value of 28%
  • Preserves the passive Investment Income Tax of 3.8% and the Medicare surtax on earned income of 0.9% which were part of the Affordable Care Act
  • Limits the account value of tax deferred and tax free retirement accounts. Excess account value above the threshold amount would be forced out as a taxable distribution
  • Taxes carried interest for hedge fund traders at ordinary income rates instead of capital gains and dividend rates

Read More: 3 Major Trends Pushing Advisors to Employ Innovative Tax Strategies

Business Taxes

  • Makes no substantial changes to current business tax rates. Keeps the top corporate income tax rate at 35% for C Corps.
  • Keeps taxes on K-1 profit for pass-through entities (S Corps and LLCs) at personal income tax bracket as high as 39.6%

Estate Taxes

  • Restores the federal estate tax to 2009 levels. This would increase the estate tax rate to 45% and reduce the estate tax exemption to $3,500,000 ($7,000,000 married).

It’s hard to determine what impact the tax reforms summarized above would have on the U.S. economy going forward.  The current annual U.S. budget deficit is projected to be around $500 billion when the next candidate takes office.  The cumulative U.S. national debt is approximately $19 trillion which is about 105% of current gross domestic product (GDP) of $18 trillion.  Any tax cuts that get enacted into law will probably have to be offset with significant spending cuts as well.    

U.S. government spending will have to be addressed going forward as millions of “baby boomers” have started to enter their retirement years.  This large generation will put pressure on the Social Security, Medicare, and Medicaid programs which will have a huge impact on the U.S. economy.  It remains to be seen how the candidates will deal with the spending side of the economic equation.

Russell E. Towers JD, CLU, ChFC
Vice President – Business & Estate Planning
Brokers' Service Marketing Group
[email protected]

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Topics: Tax Planning