At the beginning of the year with then President-elect Trump bullish on tax changes, we expected to have by now more details on his plan for tax reform. After all, tax reform was one of the top priorities on his legislative agenda. What we have gotten in the past few weeks could be described as a starting point for negotiations. It is fair to mention that changes of this magnitude won’t be made over night, the last tax reform under Ronald Reagan in 1986 took over two years.
What we know so far is that on individual taxes, he still calls for three tax rates of 10%, 25% and 35%. And even though, this is an adjustment from his previous plan of 12%, 25% and 33%, the simplification of the tax brackets remains in place. On the corporate side, he still wants a 15% rate for regular corporations and pass-through such as LLCs and Scorps. A Senate bill is already in the works for S Corporations. An interesting aspect of this bill is the easing of the rules for previous C-Corps with retained earning that elect S-Corps status. As of now if over 25% of gross receipts are passive, the company is penalized with a 35% tax on the excess, it could also lose its S-Corp status if this happens over a 3 year period. This new proposed bill will increase this threshold to 60%. The proposed bill will also allow IRAs to be S-Corp shareholders, and it will streamlined the S election process. If this indeed gets through, we might not need to file form 2553 again.
All these tax cuts will surely increase the already immense federal debt, the question remains as to how Trump will pay for all the proposed tax cuts. One of the alleged ways to balance the budget could come with the reduction of tax benefits for retirement savings. If they were to stop contributions from IRAs and instead force taxpayer’s deposit to go into a Roth IRA, it would end the deductions from the contributions to IRAs and raise revenue that could cover some of these tax cuts. Another possible way could be to freeze the current contribution limits for retirement plans by not keeping up with inflation adjustments.
Even though White House officials have reassured the public that retirement savings will remain untouched, many in the industry think otherwise. Without a border adjustment tax and no other revenues being generated, it is hard to see how Trump’s proposed tax cuts could go through. Unless, they plan to trim tax incentives for retirement plans like we mentioned before. What could eventually end up happening is a temporary tax cut for businesses and individuals, which could be a solution for the time being but it won’t sit well with business owner that are looking for a more permanent solution.
As we stand today the chance of a major tax reform seem distant, specially since Congress doesn’t seem to find a way to come up with revenue sources to offset the proposed tax cuts. Business owners and investors will likely have to wait until next year to see any major tax reform.