Memo - Trump Tax Plan Update #1

The following is an analysis of President Trump’s proposed tax plan as presented on Wednesday April 26, 2017.

Note from Chris Whalen, CPA – The information presented here is President Trump’s preliminary wish list for a tax overhaul. When all is said and done, and based on many of his other pre-election promises failing, some or none of these changes may come to pass.

President Trump’s tax plan could dramatically reduce tax revenues. If we don’t see a corresponding reduction in government spending, this plan will may increase the annual deficits, the national debt, inflation and interest rates. It will also require more quantitative easing, which only further dilutes the value of every dollar you are holding. Even if we do see the economic growth forecasted by the current administration, I don’t foresee that making up for the shortfall in tax revenues.

What hasn’t been discussed, and is a major variable impacted by deficits and economic growth, is an increase in interest rates. The amount of interest on the existing debt and the new incremental debt could be staggering as interest rates increase. This is the phantom, a huge phantom, lurking under our country’s collective bed. Interest rates have been kept artificially low for a long time and many people don’t realize that just an uptick in rates, which will eventually happen, will make any projected net federal revenues meaningless.

Many factors need to align in order for this proposed plan to put the country in the black.

President’s Trump’s Tax Plan Highlights

Number of tax brackets goes down to three – 10%, 25% and 35%

Standard Deductions will double, Married Couples were $12,600 and will be approximately $24,000. Single people were $6,300 and will be approximately $12,700. This means that fewer taxpayers will be itemizing their deduction.

The president wants to eliminate some itemized deductions such as real estate taxes paid, state income taxes paid and charity. Look for the real estate brokers lobby to attack this proposal full bore. People buy homes, taking on enormous debts in the process, mainly to secure the additional tax deductions of mortgage interest and real estate taxes. Moving more people towards a standard deduction, and eliminating real estate tax deductions, would take most of the tax benefits of home ownership away from most taxpayers.

Also, the combination of eliminating the real estate tax and state income taxes paid deductions, makes the appeal of low or no tax states much higher for higher income taxpayers. There could be a flight of people from high tax states like NY as the tax benefits of paying those high state taxes would no longer exist. This can also reduce property values significantly, as the moneyed citizens escape leaving middle and lower income citizens in some states.

The Alternative Minimum Tax will be repealed. This has been crushing so many of middle class clients and will be very welcome change.

The Estate Tax will be repealed. This is great for everyone. For businesses though, this is much needed. Today, in order to transfer ownership of your company to your heirs, often times a huge estate tax needs to be paid, forcing the liquidation of the assets needed to continue the business you built! When the estate tax is abolished, your business assets can remain intact for the next generation just as you intended and desire.

The Capital Gains Tax rates remain the same.

Repeal of the Obamacare related taxes: Additional Medicare Tax, 0.9% and Net Investment Income Tax, 3.8%

Reduce the Corporate Income Tax from 35% to 15%. BUT, and this is good news to middle class business owners, he wants to extend this rate reduction to small business owners as well. This means that a small sole proprietor’s maximum rate on their net self-employment earnings would be 15%. An incredible savings. This would also see an exodus of people from W2 jobs to independent contractor status looking to take advantage of those tax savings, and rightfully so. This would be a huge increase in those participating in the “gig” economy.

Now is the time to evaluate how Trump’s Tax Plan could impact your family and your business. My team is here and ready to assist you in the analysis of every aspect of your income tax and financial lives.

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