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 extent 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 nevertheless calls for three tax rates of 10%, 25% and 35%. And already though, this is an adjustment from his past plan of 12%, 25% and 33%, the simplification of the tax brackets remains in place. On the corporate side, he nevertheless wants a 15% rate for regular corporations and pass-by 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 past C-Corps with retained earning that elect S-Corps position. 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 position if this happens over a 3 year period. This new hypothesizedv bill will increase this threshold to 60%. The hypothesizedv bill will also allow IRAs to be S-Corp shareholders, and it will streamlined the S election course of action. If this indeed gets by, 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 hypothesizedv 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 place 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.
already though White House officials have reassured the public that retirement savings will keep 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 hypothesizedv tax cuts could go by. Unless, they plan to trim tax incentives for retirement plans like we mentioned before. What could ultimately end up happening is a permanent 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 long-lasting 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 supplies to offset the hypothesizedv tax cuts. Business owners and investors will likely have to wait until next year to see any major tax reform.