As this is a presidential election year, I wanted to compare this month the tax proposals that the nominees or presumptive nominees of each major party have proposed to date. Donald Trump secured the Republican nomination this week at the Republican National Convention in Cleveland and Hillary Clinton is expected to secure the nomination next week at the Democratic National Convention in Philadelphia.
There are many considerations Americans take into account before casting their votes for president of the United States of America including criminal justice, education, energy, foreign policy and military, health care, gun control, abortion, immigration, labor and wages, drug laws, environment and race relations but the area that tends to be important every election is the economy and taxes. You have likely heard the phrase “it’s the economy, stupid!” It does seem, based on my experience, that the President of the United States receives too much credit and/or blame for the state of the economy no matter who is in office. We tend to attribute the success or failure of the economy to the President in every case even though there are many factors out of his or her control.
Let’s examine the tax policies proposed by Hillary Clinton first. She has proposed a 4 percent surcharge on adjusted gross income (AGI) over $5 million, a 30% minimum tax on taxpayers with AGI above $1 million (the Buffett Rule), a limitation on the tax value of specified deductions and exclusions at 28% and a new schedule for capital gains tax with rates declining according to the holding period. Assets held less than two years would be taxed as short-term gain at higher ordinary income tax rates (the current law treats assets held less than one year as short-term gain taxed at higher ordinary rates). The 23.8% capital gains rate would only apply to assets held six or more years.
Additionally, she has proposed that carried interest income would be taxed as ordinary income. Her proposals would also prevent taxpayers with very high balances in tax-favored retirement accounts from making additional contributions. Her proposals would require that derivative contracts be marked-to-market annually, with any resulting gain or loss treated as ordinary income or loss. She has proposed tax credits for caregiving expenses for elderly family members and high out-of-pocket health care expenses.
Regarding the estate tax exemption, she has proposed to permanently reduce the tax threshold for estates to $3.5 million (currently $5.45 million) per individual with no adjustment for future inflation, increase the maximum rate to 45% (currently 40%) and set the lifetime gift tax exemption at $1 million. She has also called for consistency between valuations for estate and gift taxes and those used for income tax purposes.
Regarding business taxes, she has proposed levying an “exit tax” on unrepatriated earnings (income transferred outside the US), assessing a “risk fee” on the largest financial institutions and enacting a tax on high-frequency trading. She has proposed to eliminate tax incentives for fossil fuels and to subject crude oil produced from tar sands to the excise tax levied to finance the Oil Spill Liability Trust Fund.
She has called to provide tax credits for businesses that invest in community development and infrastructure as well as for businesses that hire apprentices or share profits with employees.
The stated goals of her tax proposals are to address income inequality and to fund her college-affordability plan. She also hopes to deter US tax avoidance by companies and individuals. Many of her proposals replicate or build on proposals from President Obama.
Let’s now examine the tax policies proposed by Donald Trump. He has proposed significant reduction of marginal tax rates for individuals and businesses, increasing the standard deduction amount to nearly four times the current level and repealing the alternative minimum tax (AMT) and the estate and gift tax. The proposal would cut taxes at every income level. Overall, the plan would cut taxes by an average of $5,100, or about 7% of after-tax income. Middle-income taxpayers would receive an average tax cut of roughly $2,700, or 4.9% of after-tax income.
The marginal tax rate cuts would boost incentives to work, save and invest assuming interest rates don’t change. In order for the plan to not increase the federal deficit, however, substantial federal spending cuts would be required.
He has proposed to replace the current seven tax brackets which range from 10% to 39.6% with three brackets of 10%, 20% and 25%. He would increase the standard deduction to $25,000 for single filers and $50,000 for joint filers (currently $6,300 and $12,600, respectively). This would obviously reduce the number of taxpayers who claim itemized deductions each year since the standard deduction would be more beneficial. He would tax dividends and capital gains at a maximum rate of 20%. He would limit the tax value of itemized deductions, except for charitable contributions and mortgage interest, and exclusions for employer-provided health insurance and tax-exempt interest. He would increase the income phase out for personal exemptions and the income limit on itemized deductions.
For business taxes, he would reduce the corporate tax rate to 15% and limit the top individual income tax rate on pass-through businesses such as partnerships to no more than 15%. He would repeal most tax breaks for businesses and impose a 10% deemed repatriation tax on accumulated profits of foreign subsidiaries of US companies. He would repeal the 3.8% net investment income tax on high-income taxpayers.
His stated goals related to his tax plan are to provide tax relief for the middle class, simplify the tax code and grow the American economy without adding to the debt or deficit.
At any rate, I hope that this information is useful to you in the overall scheme to help you make your decision as to who you will vote for in November. If you have any questions or needs related to tax, accounting or financial advising, please contact us.