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The Trump Tax Plan: Naughty or Nice?

On April 26, 2017, the Trump administration unveiled their new tax plan.  Like Santa coming to town, there was something in it for everyone.  However, some of the kids in your neighborhood are going to get more gifts than others.  Let’s take a look at Santa’s list:

Download the whole PDF:  The Trump Tax Plan – Naughty or Nice

“Ok Santa…..what’s in the bag?” 

Here is a brief summary of the big changes to the tax code:

Present 1:  A 15% Corporate Tax Rate. The proposed plan reduces the corporate tax rate from the current 35% to 15%.

Present 2:  Doubling the standard deductions.  For taxpayers that do not itemize deductions, they take the standard deduction which in 2017 is $6,350 for single filers and $12,700 for married filing joint.  The proposed plan doubles the standard deductions to $12,700 for single filers and increases to $24,000 for married filing joint.  This would most likely result in more tax payers taking the standard deduction going forward because a married couple filing joint would need over $24,000 in itemized deductions before they would itemize.

Present 3:  There is a BIG present for small business owners.  All pass through income for small business entities will be capped at the 15% federal tax rate.  For owners of partnerships and S-corps, the profits of the company flow through to the owner’s individual tax return as “pass through income” and it’s taxed at the ordinary income tax rates.  Currently the top personal income tax rate is 39.6%.  This means that small business owners in the highest tax bracket could see their federal income tax rate drop by as much as 24.6%!!!  For a married couple earning $570,000 per year, the taxes on the top $100,000 of their income would be reduced by approximately $24,600. 

Present 4:  Individuals will still be allowed to deduct their mortgage interest. The Trump tax plan eliminates a number of deductions that are currently allowed in the tax code.  One of the most common deductions for homeowners is their mortgage interest and it was feared that this deduction would be lost.   However, with the increase in the standard deduction a married couple filing joint would need over $24,000 in itemized deductions, which includes mortgage interest, for it to even matter.

Present 5:  3 tax brackets instead of 7.  Right now, there are 7 tax brackets 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.   The proposed tax plan would reduce the tax bracket to 3:  10%, 25%, and 35%. 

Present 6:  Elimination of the estate tax.

Present 7:  Repeal the 3.8% tax on investment income.

Present 8:  Repeal the alternative minimum tax.

“Who is on the Nice List?” 

The plan is designed to provide wide spread tax savings to all.  However, as mentioned earlier there are kids that will receive more gifts than others.  The kids receiving the most gifts are Corporate America, small business owners, and high net worth individuals.  A married couple earning $80,000 per year that owns a house may see their taxes reduced by 1% – 10% under the new tax plan.  However, if you are a small business owner making $400,000 per year your overall tax bill may be reduced by 15%+.  Since the income ranges for the 3 new tax brackets have not been released yet only estimates can be offered at this point.

“Who is on the Naughty List?” 

This is kind of a trick questions because we ALL may be on the naughty list.  But we may not find out until 2019 or 2020.  Let me explain why.  The Trump administration does not have an infinite amount of time for this tax stimulus package to work.  Think of the government like a person.  The tax revenue is your paycheck and you have expenses.  Instead of your expenses being a mortgage or a student loan, the government’s expenses take the form of social security payments, spending on roads and infrastructure, and basically everything else that keeps the government running.   The tax cut is like your paycheck getting cut in half but your expenses are going to start increasing because the government plans to spend more on roads and defense.  Ouch!!  So how do you make ends meet?   Answer, you borrow money to meet your expenses. 

Trump’s grand plan design is this: the government is going to decrease taxes which will lead to an increase in economic growth. That growth will lead to more income to tax which will eventually make up the gap.  However, timing is everything.  It’s a given that our federal deficit is going to spike in the short term and it’s not news to anyone that it is already at a high level.   If the growth does not come fast enough to replenish the amount of revenue that the government is losing from the tax breaks………….look no further than what happened during the Reagan administration in 1981.  In the fall of 1981, President Reagan slashed tax rates in the hope to reignite growth coming out of the recession from the late 70’s.  The tax reform was passed in 1981 but in 1984 they had to roll back most of the tax cuts because the deficits spiked.   History could repeat itself this time around.  Going back to our Christmas theme, it’s like Santa brought us all of these great toys but we find out three years later that they were all made with lead paint.   


Changes will most likely be made to the Trump proposed tax plan before it reaches its final form but there is wide spread support for tax reform so it seems to be a question of “when it will pass” as opposed to “if it will pass”.   While the tax reform could provide a fiscal boost to the economy in the short term, the duration of the current bull market rally will most likely hinge on the level of the U.S. deficit.  Overall this could work but time will tell.


About Greenbush Financial Group

Greenbush Financial Group, LLC is an independent registered investment advisory firm located near Albany, NY.  The firm offers employer sponsored retirement plans, fee based financial planning, and investment management services.


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