As the list of Democratic and Republican presidential candidates has been reduced to three, Donald, Hillary, and Bernie Sanders, many of our clients have wondered, how will a change in the Oval Office affect their tax return for 2017 and beyond? Setting aside all of the other issues, how will a Donald Trump administration affect the bottom line of their tax return? What about a Hillary Clinton presidency?
Bernie Sanders tax plan is not analyzed in this article because put simply, if you don’t like paying taxes, do not spend the weekend with Bernie, let alone vote for him. Bernie’s tax plan would add four new personal income tax rates to the current regime: 37%, 43%, 48%, and 52% and households with income greater than $250,000 will pay tax on all capital gains and dividends at their ordinary tax rates. This is not meant to be a “bern” on Bernie’s campaign or his chances of winning, but for all that his campaign has to offer the American people, a plan to pay fewer taxes is not one of them.
These figures came from either the Tax Foundation’s website and/or the candidate’s website directly. For the sake of simplicity, these figures are for married couples filing jointly. I apologize in advance to those with any other the tax filing status. Without further adieu, here are those parts of Clinton and Trump’s tax plans that are probably the most relevant to our clients.
Donald Trump
Here are twelve highlights (or lowlights) from Trump’s tax plan, also known (or not known) as the “dirty dozen”:
- Personal Income Tax. Those with personal taxable income of less than $50,000 will pay a tax rate of zero (0%). On his site, Trump says, these folks can send a one page form to the IRS saying, “I win”.
- Personal Income Tax. The highest personal income tax rate under Trump’s plan is 25%, which applies to taxable income greater than $300,000. Overall, Trump’s plan is a significant decrease from the current personal income tax bracket, which has rates as high as 39.6% on taxable income greater than $466,000.
- Personal Income Tax. Everyone else (those whose income is less than $300,000 but greater than $50,000 will pay either 10% or 20%. For example, those with taxable income of $75,000 would pay tax 10%. Under the current tax code, it would be 25%
- Personal Income Tax. Trump’s plan would eliminate the alternative minimum tax completely.
- Personal Income Tax. Trump’s plan would phase out all deductions except the charitable deduction and the mortgage interest reduction.
- Capital Gains/Income Tax. Dividends and long-term capital gains would be taxed at 15% for income between approximately $100,000 and $300,000 and 20% on amounts greater than $300,000. This is a significant decrease in taxes from the current tax code, which has a tax rate of 15% for income between approximately $75,000 and $465,000 and 20% on amounts greater than $465,000.
- Business/Corporate Tax. The corporate income tax would become a flat rate of 15% across the board. This is a significant decrease in the corporate tax rates.
- Business/Corporate Tax. Trump’s 15% flat corporate tax would apply to all business income, even on income earned by “pass-through” entities, such as LLC’s. Most small business owners in America operate their business as a “pass-through” entity, meaning for tax purposes, their income passes through their business without being taxed and is simply taxed as personal income of the business owner. Trump’s website tries to spin this new tax as a good thing, but the fact is small business owners who operate their business via pass-through entities such as LLC’s will probably not appreciate this new tax.
- Estate Tax. Trump would eliminate the estate tax altogether. Currently, the highest estate tax rate is 40% although estates worth less than $5.25M (million) are exempt from estate taxes.
- Payroll Taxes. Trump’s plan does not address payroll taxes in any direct or significant way. None of the candidate’s plans do, but I wanted to mention it since many small business owners are affected by payroll taxes.
- Retirement Plans. Trump’s plan does not address retirement plans in any direct or significant way. I mention this because it is in contrast to Hillary’s plan which proposes to close the “Romney Loophole”.
- Carried Interest. Our law firm practices in the area of raising capital, so we have clients who are fund managers/sponsors. If you are not a fund manager/sponsor, you can skip the rest of this paragraph. Under Trump’s plan, carried interest income would be taxed at ordinary rates. This is quite a departure from current conditions which tax carried interest income as capital gain/dividend income. Unfortunately for said managers/sponsors, this proposed change would be implemented by all of the remaining candidates.
Hillary Clinton
Here are twelve highlights (or lowlights) from Hillary’s tax plan, also known as the “dirty dozen” (yes, both Hillary’s and Trump’s tax plan highlights are referred to by me as the “dirty dozen”, not as a “knock” on their plans but because I couldn’t think of anything else to call them):
- Personal Income Tax. Personal income tax rates would remain basically the same, except her plan would add a new tax rate of 43% to married couples filing jointly with net income of $5M (million) or more.
- Personal Income Tax. She would also implement the “Buffett Rule”, which is a 30% minimum tax on adjusted gross income over $1M (million).
- Capital Gains / Dividends. Hillary’s tax plan regarding long-term capital gain and dividends would be similar to the current regime except she would impose a tax of 24% on income of $5M (million) or more. The current the tax rate on long-term capital gain is between 15 % and 20%.
- Capital Gains. Hillary’s plan would raise the income tax rates on “medium” capital gains to between 20% and 39.6% depending on the holding period. Even income from property which has a holding period that has been traditionally considered long-term, such as two years, would be taxed at 39.6%.
- Business/Corporate Tax. Hillary’s plan regarding business is aimed at large financial institutions and multi-national companies.
- Business/Corporate Tax. Her plan provides tax credits for profit-sharing with employees.
- Business/Corporate Tax. Even though she would not reduce the corporate rate to 15% like Trump, the fact that she did not impose a business tax on pass-through entities is, from a small business perspective, a good thing.
- Business/Corporate Tax. Her plan proposes a business tax credit for profit-sharing and apprenticeships.
- General. She would cap all itemized deductions to a tax value of 28%. This means the actual dollar for dollar value of the tax savings cannot exceed 28% of the deduction taken. This reduces the deduction value on those in tax brackets above 28%.
- Estate Taxes. Under Hillary’s plan, the highest estate tax rate would increase from 40% to 45% and the exemption amount would be reduced from $5.25M (million) to $3.5M (million).
- Payroll Taxes. Hillary’s plan does not address payroll taxes in any material way.
- Retirement Plans. Under Hillary’s Plan, she would close the “Romney Loophole” by “limiting the ability of the very wealthiest to game the system” by sheltering millions of dollars in tax-preferred retirement accounts.
Conclusion
Trump’s overall reduction and simplification of the personal income tax bracket and the corporate tax bracket is attractive. However, applying the corporate tax to pass-through entities is going to have an impact on the tax return on many small business owners, and not in a good way. Hillary’s plan is fairly comparable to the current tax code, although her increase in capital gain tax rates could have a negative impact on everyday folks, not just the rich, which is where her plan seems to focus.