Donald Trump is the President-Elect of the United States and with the House and Senate controlled by the Republican party there’s a good chance we may see some reform in the tax code. Based on some of the policy proposals that have been floated here is what we think will happen:
A Flattening of the Individual Income Tax
The current tax code is comprised of 7 tax brackets ranging from 10% to 39.6%. We would expect to see the top rate reduced back to 35% and the number of brackets reduced to 3 or 4. It has also been discussed that the standard deduction would be raised as well (currently $12,600 for Married Filing Jointly). Not much would change for those at the lower ends of the tax brackets, but we don’t think they’ll lose any ground either. It is difficult to cut taxes at those levels, because they are already at a minimum. Upper middle- and the upper class would see their taxes reduced the most.
A Repeal of the Alternative Minimum Tax (AMT)
The AMT was originally proposed as as a means of getting the "fair share" from those few tax payers that were able to mitigate their tax consequence through various tax shelters. Over the years, it has ensnared quite a few upper middle class people who have children and live in a high tax state like Wisconsin. This is because the AMT computes a flat tax after eliminating deductions for things like children and taxes paid. It’s a tax that has outlived its usefulness and will likely see its end.
Corporate Taxes Will Go Down
The globalization on the economy is a complicated issue, but many feel that one of the reasons that many jobs have moved overseas is that our corporate tax rate is one of the highest in the world. The belief is that cutting the rate will encourage more investment in the States and perhaps some growth in wages.
Repeal of ACA Surcharges
One of the elements of the Affordable Care Act was the passage of an income tax surcharge on higher wages and investment income. We expect that tax to go by the wayside, but see the rules for taxing capital gains and passive activity rules to remain.
We don’t believe the tax code will become significantly simpler, but higher standard deductions may make things easier for those who are barely above the itemized deduction threshold now. They may be able to simply go with the standard deduction and not have to worry about things like mortgage interest, charitable contribution, etc. While we think we will see some rates fall, we don’t anticipate a radical overhaul of the system.