Skip to content
Next On Deck: White House Gears Up for Major Tax Reform Offensive Despite Health Care Bill Setback (Part one of a two-part commentary series)

By Andy Hoffman, CFP®
March 30, 2017

President Trump's defeat on the American Health Care Act last week may dictate a more bipartisan approach with Congress going forward, but it won't curtail his efforts to tackle tax reform legislation next. Commerce Trust Company Financial Planning Analyst Andy Hoffman, CFP, sheds the drama and shines a light on potential 2017 tax reform in the first of a two-part series. No matter where your political interests might be, tax reform is sometimes the product of very pragmatic horse-trading, which could still conceivably result in legislation before year's end. The contingencies spelled out here may help you sort through some possible historic tax measures for individuals and businesses.

As rancorous as the political climate is now, there is precedent for passing tax reform in a hostile legislature from the not-too-distant past. President Ronald Reagan discovered early on that cobbling together a workable tax reform package is possible with an end product that could surprise all parties.

Attempting to usher in the greatest change to the tax code since the 1980s is going to be messy, let alone accomplishing it by the August Congressional recess. While the prospect of lower taxes for all and a simplification of an overly complex system are appealing to most, there are groups who have their concerns with the proposals.

Let's start at the macro-industry level. For companies who rely heavily on imports, energy and retail, they would see a drastic rise in their operating costs due to the proposed border adjustment tax. On the other hand, the manufacturers that do not rely heavily on imported goods view this as a benefit because their exports would no longer be taxed, making their goods less expensive around the world.

At the individual level, there are concerns from lobbying groups regarding the impact of the increase in the standard deduction. Two groups, the National Association of Home Builders and the National Association of Charitable Gift Planners, have voiced apprehension with the proposals.

In a nutshell, if the standard deduction is increased, more people will claim it and no longer itemize their deductions. The National Association of Home Builders sees this as potentially reducing the value of the mortgage interest deduction, possibly lessening demand for homes in the United States. Using similar logic, the National Association of Charitable Gift Planners sees the potential change as lowering the benefit from charitable giving, possibly impacting their members.

The vetting process will be very complex and has multiple participants with very different incentives and motivators. If something as simple as increasing the standard deduction faces such concentrated opposition, we have to wonder about the prospects for more fundamental reform.

And yet, voting the population's pocket book can produce unusual economic alliances.

Of all the platforms President Trump campaigned on in 2016, none will impact more Americans than potential income tax reform. Treasury Secretary Steven Mnuchin recently stated the administration is seeking to complete an overhaul of the tax code prior to Congress' recess in August. While the Republicans control the White House and both houses of Congress, they still must come to an agreement on details of any legislation.

President Trump is expected to release the final details of his plan in the coming weeks, but here is a look at what we know about the proposed changes from the Trump Plan and the House Republican Plan:
  • Income Tax Brackets
    • Under both the Trump Plan and House Republican Plan, the current seven brackets would be consolidated into three brackets; 12%, 25%, and 33%. President Trump's proposal would set the 12% bracket for married couples at the first $75,000 of income, the 25% bracket from $75,000 to $225,000, and the 33% bracket for all income over $225,000.
      • More recent comments by the president suggest that even a 0% bracket could be added to the plan. But as with all other points, this is speculation.
    • Alternative Minimum Tax (AMT) would be repealed under both plans. 
  • Deductions and Exemptions
    • The Trump Plan would cap itemized deductions at $200,000 for married couples ($100,000 for individuals). The standard deduction would increase to $30,000 for married couples ($15,000 for individuals). Personal exemptions would be eliminated.
    • The Trump Plan also includes a new deduction for families with children under the age of 13. The deduction would be for child care expenses for up to four children. They would be capped at the average cost of child care in the state for a child of that age. It would apply to third-party child care facilities, as well as the implied cost of child care if the care is provided by stay at home parents or unpaid relatives. This deduction would be available to all taxpayers, regardless of income.
    • The House Republican Plan would eliminate nearly all deductions except mortgage interest and charitable deductions. The standard deductions would increase to $12,000 for individuals, $18,000 for individuals with a child, and $24,000 for married couples. 
  • Investment Income and Capital Gains Rates
    • The current structure of 0%, 15%, and 20% capital gain rates would remain in place under the Trump Plan. Each of these rates would correspond to the three individual tax brackets listed above.
    • Under the Republican Plan, half of all investment income (capital gains, qualified dividends, and interest income) would be excluded from income. The remainder would be taxed as ordinary income. In essence, this means investment income would be taxed at half of the ordinary income tax rates (6%, 12.5%, and 16.5%).
    • The Net Investment Income Tax of 3.8%, put in place when the Affordable Care Act was adopted, would also be repealed under both plans. 
  • Estate and Gift Taxes
    • Both plans would repeal the existing estate tax.
    • The Trump Plan would tax capital gains held until death with an exemption of $5 million for individuals and $10 million for married couples.
    • Neither Plan has discussed any changes to the existing Gift Tax regime. It may be relevant to remember that when the estate tax was phased out during 2001-2010, the gift tax remained in force for all years, and that the adjustments to the gift tax exemption during 2001-2009 were much smaller than the increases to the estate tax exemptions in those years. 
  • Simplification
    • Both plans do stay true to the promise of simplifying the current tax code.
    • However, note that the simplest idea in all of the proposed tax law changes is to increase the standard deduction.
      • Under the Trump Plan, it is projected the number of households that itemize deductions would drop by 60% as those taxpayers would instead claim the larger standard deduction.

As the crescendo builds toward this potential legislation, you may find it advantageous to discuss potential outcomes with your financial planner. If you would like to discuss your financial planning options with a Commerce Trust analyst, just email Andy Hoffman at andy.hoffman@commercebank.com, or call this toll-free number, 800-892-7100, ext 1-7329.

Commerce Trust Company
Disclosures:

http://www.taxpolicycenter.org/publications/analysis-donald-trumps-revised-tax-plan

http://www.taxpolicycenter.org/publications/analysis-house-gop-tax-plan/full

Past performance is no guarantee of future results, and the opinions and other information in the investment commentary are as of March 30, 2017. This summary is intended to provide general information only and reflects the opinions of Commerce Trust Company Investment Policy Committee.

This material is not a recommendation of any particular security, is not based on any particular financial situation or need, and is not intended to replace the advice of a qualified attorney, tax advisor or investment professional. Diversification does not guarantee a profit or protect against all risk.

The information in this commentary should not be construed as an individualized recommendation of any kind. Strategies discussed here in a general manner may not be appropriate for everyone.

Commerce Trust does not provide tax advice or legal advice to customers. Consult a tax specialist regarding tax implications related to any product or specific financial situation.

Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. All expressions of opinion are subject to change without notice depending upon worldwide market, economic or political conditions.

RELATED ARTICLES

ABOUT THE AUTHOR

Andy Hoffman
Andy Hoffman, CFP® Vice President, Private Client Advisor Commerce Trust Company
Andy is a private client advisor for Commerce Trust Company. He serves as a consultant and relationship manager providing clients with personalized objective advice and oversight across all of our services, including trust administration, financial advisory services, private banking, and investment management. Andy facilitates all aspects of relationship management for the client team, including administering complex trusts, maintaining client communication, and coordinating with internal and external partners to deliver a superior client experience. He joined Commerce in 2016 with ten years of industry experience. Andy received his bachelor of science degrees in finance/economics and MBA with a concentration in finance from Rockhurst University. He has achieved the designation of Certified Financial Planner. Andy is a member of St. Ambrose Catholic Church and the Crusaders Club at St. Ambrose.
Skip to Navigation Back to top