Seemingly, every presidential candidate offers a tax reform plan. As November 8th nears, Donald Trump and Hillary Clinton have both unveiled their tax reform plans. At Kendall Capital we have taken a close look at their tax reform goals and the key reforms to federal tax law that might result if either plan is enacted.
Under Trump’s plan, the standard deduction would rise from the current level of $6,300 to $25,000 for single filers. Joint filers could claim a $50,000 standard deduction. Trump’s plan would also consolidate the current seven federal income tax rates to three – 12%, 25%, and 33%. The estate tax would vanish entirely under Trump’s plan. Taxes on capital gains and dividends would top out at 20%.
Trump would also like to reduce the corporate tax rate from 35% to 15%. The new lower rate would apply to partnerships, LLCs, S corps and C corps. (With a proposed corporate tax ceiling of 15% and a proposed individual tax ceiling of 33%, some economists have wondered if a Trump presidency might generate a wave of individuals incorporating themselves). Full expensing would also be allowed for business investments under Trump’s plan.
Notably, Trump’s reforms would do away with the deferral of taxes on foreign profits. As it stands now, corporate taxes on foreign profits are deferred until overseas affiliates repatriate them. It can take years for those inbound dividends to arrive. The Trump plan would tax domestic and foreign profits on the same current-year basis.
Trump has also spoken of greater tax relief for families raising children by enhancing the Dependent Care deduction with a focus on child care. If the Trump plan applies a child care deduction to payroll taxes rather than income taxes, many lower-income households could claim it. However, that would mean ultimately less revenue for the current government programs which are funded by payroll taxes – Social Security and Medicare.
Hillary Clinton’s tax plan would lower some taxes and raise others. As the non-partisan Tax Policy Center has noted, only around 5% of Americans would see any real change to their taxes, but the richest Americans would pay higher income taxes under her plan. Clinton’s corporate tax reforms would encourage firms to do more business in America, while her estate tax reforms could prompt changes in wealth transfer planning for some families.
Under Clinton’s plan, taxpayers with adjusted gross incomes greater than $5 million would pay a 4% surtax, effectively setting their marginal tax rate at 43.6%. Anyone earning more than $1 million would face an effective tax rate of 30%. Investors would have to buy and hold for longer intervals to take advantage of long-term capital gains tax rates. The current long-term rate of 20% would only apply if an investor owned an investment for six years; in preceding years, it would be incrementally higher. The federal estate tax would also rise to 45% through Clinton’s reforms. The current $5.45 million individual exemption would be reduced to $3.5 million ($7 million for married couples).
Clinton’s plan would adjust corporate taxation. U.S. firms would find it harder to make tax inversions, whereby they merge with an overseas competitor and move their headquarters overseas to exploit that nation’s lower corporate tax rate. Earnings stripping, in which U.S. affiliates of multinational corporations “strip” profits from their stateside taxable income and send them to overseas parent companies in pursuit of tax savings, would cease. Companies would be limited on deducting interest payments on their debt. While she has talked of a tax on the biggest financial institutions, Clinton has also expressed a desire to make the process of estimating, filing, and paying taxes less involved for small business owners.
Like Trump, Clinton wants tax relief for families. She wants a new kind of tax credit for child care; the details have yet to emerge.
These plans have one destination: Congress. There is no telling how many or how few of these reforms may become law if Clinton or Trump are elected.
Kendall Capital is a wealth management firm providing financial advisory services in the Washington, DC area to individuals and families with assets of more than $500,000.