OUTLOOK ON U.S. TAX REFORM Thomas F. Wheeland Tax Partner St. Louis April 27, 2017
Agenda Outlook on tax reform Key aspects of current tax proposals compared Other considerations & takeaways
Tax Outlook Is Uncertain Impossible to predict possibility of tax reform in 2017 Many legislative priorities in addition to tax reform Unclear if any tax legislation would be retroactive to January 1, 2017 Substance of any tax reform is uncertain Details of current proposals need to be more fully developed Could require bipartisan support
Election Results Republican Donald J. Trump elected to serve as 45 th President of the United States Republican majority in House of Representatives 241 Republican 194 Democrat Republican majority in Senate 52 Republican 46 Democrat 2 Independent
Important Aspects of Legislative Procedure All tax legislation must originate in the House 60 votes in Senate are necessary to prevent filibuster Budget reconciliation bills have procedural protections that facilitate passage
Federal Budget Process Congressional Budget & Impoundment Control Act of 1974 Framework for congressional budget process Starts with President s budget request Congressional budget resolution Authorization & appropriation
The Republican Tax Proposals President Trump s campaign tax proposals (President Trump) House Republican proposal: A Better Way: Our Vision for a Confident America (House Blueprint)
Comparison of Highlights from Tax Proposals Business Proposal Current tax law President Trump House Blueprint Corporate tax rate Top rate of 35% Top rate of 15% Top rate of 20% Alternative minimum tax 20% Repealed Repealed Pass-through tax rate Individual rate on ordinary income 15% on profits retained within business 25%
Comparison of Highlights from Tax Proposals Business Proposal Current tax law President Trump House Blueprint Cost recovery Over useful life of asset Manufacturers may elect immediate deduction 100% deduction for tangible & intangible assets Interest expense Deduction allowed for interest expense Manufacturers electing immediate cost recovery lose interest deduction Eliminate deduction for net interest expense Other business tax provisions Various Eliminate all except R&E credit Eliminated all except R&E credit & LIFO
Comparison of Highlights from Tax Proposals Business Proposal Current tax law President Trump House Blueprint Untaxed accumulated foreign earnings Future foreign earnings Not addressed 10% payable over 10 years with future profits taxed as earned Worldwide income tax based on residence & source Not specifically addressed 8.75% for cash/cash equivalents, 3.5% otherwise, payable over eight years Border adjusted destination-based cash-flow tax
House Blueprint Proposes Border Adjusted Destination-Based Cash-Flow Tax Destination-based Tax imposed based on place of consumption Cash-flow Immediate expensing for tangible & intangible assets Deduction for net interest expense eliminated Border adjusted Gross receipts from export sales exempt Tax on imports
Comparison of Highlights from Tax Proposals Individual Proposal Current tax law President Trump House Blueprint Individual rates on ordinary income Seven brackets with top rate of 39.6%* Three brackets of 12%, 25% & 33% with repeal of NIIT Three brackets of 12%, 25% & 33% Capital gains rate Top rate of 20%* Current structure with repeal of NIIT 50% deduction with basic rates of 6%, 12.5% & 16.5% Interest income Seven brackets with top rate of 39.6%* Three brackets of 12%, 25% & 33% with repeal of NIIT 50% deduction with basic rates of 6%, 12.5% & 16.5% *Plus 3.8% net investment income tax (NIIT)
Comparison of Highlights from Tax Proposals Individual Proposal Current tax law President Trump House Blueprint Carried Interest Capital gains rate Ordinary income rate Not addressed Alternative minimum tax Net investment income tax 28% maximum rate, exemption of $53,900 for single filers ($83,800 MFJ) Repealed 3.8% Repealed as part of ACA Repealed Repealed as part of ACA
Comparison of Highlights from Tax Proposals Individual Proposal Current tax law President Trump House Blueprint Itemized deductions Phased-out based on adjusted gross income Cap of $100,000 for single filers ($200,000 MFJ) & steepening of phase-outs Eliminate all but mortgage interest & charitable contribution Standard Deduction* $6,300 for single filers ($12,600 MFJ) $15,000 for single filers ($30,000 MFJ) $12,000 for single filers ($24,000 MFJ) Personal Exemption* $4,050 Eliminated Eliminated *Subject to phaseout based on adjusted gross income
Comparison of Highlights from Tax Proposals Transfer Tax Proposal Current tax law President Trump House Blueprint Estate tax Gift tax Generationskipping transfer (GST) tax 40% tax rate with $5,450,000 basic exclusion amount 40% tax rate with $5,450,000 basic exclusion amount 40% tax rate with $5,450,000 basic exclusion amount Repealed but capital gains held until death subject to tax with exclusion on first $10 million* Repealed Not specifically addressed *Presumed $5 million per individual ($10 million per married couple) Repealed Not specifically addressed Repealed
Other Considerations Income tax accounting considerations Possible repeal of Affordable Care Act Impact on state & local tax
Tax Planning Considerations Taxpayers that expect tax reform & tax rates to decline in should consider tax planning strategies to accelerate deductions & defer income There are significant risks to postponing estate planning decisions based on potential repeal of estate taxes
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THANK YOU! FOR MORE INFORMATION Thomas F. Wheeland 314.540.8285 thomas.f.wheeland@bkd.com