Senate Republicans are expected to unveil their tax plan this week and while we don’t yet know the details, the rumors are that there will be $1.5 trillion in tax cuts over the 10-year budget window. Even days before the announcement, lawmakers are divided on some key issues. In a surprise move, Republicans are reportedly considering maintaining the top income tax bracket of 39.6 percent, which applies to ordinary income above $470K for married filing jointly (MFJ) and $418,400 for single filers. Earlier this month, the President said, “the rich will not be gaining at all with this plan…the wealthy will be pretty much where they are…If they have to go higher, they’ll go higher, frankly.”
Of course, this brings up the hotly debated question: What is the definition of wealthy? Data available from the IRS breaks it down based on adjusted gross income. The top one percent reported adjusted gross incomes of over $466,000 in 2014, the most recent year for which the data is available. The top three percent was $246,000 and the top five percent was $189,000.
Here are 12 questions that need to be resolved when the Republican tax plan is released:
- What are the new tax brackets? The President wanted a reduction from seven to three - 10, 25 and 35 percent, but never detailed the breakdown of income levels to which the new rates would apply.
- Will mortgage interest, retirement plan and charitable contributions be deductible? Previously, Treasury Secretary Steven Mnuchin said all three would remain intact, but there have been some murmurings that there could be limitations on retirement plan contributions for wealthy taxpayers, though no income levels have been floated yet. Retirement plans might seem sacrosanct, but mortgage interest already has a $1 million limitation for deductibility. It might be easy for lawmakers to argue that the amount should drop to $500,000.
- Will state and local taxes be deductible? Mnuchin recently doubled down on the administration’s desire to eliminate the federal deduction for state and local taxes, which would be painful for taxpayers in high tax states like CA and NY.
- Is there a break for child and dependent care expenses? The President’s one-page proposal said there would be relief on this front, but did not specify the dollar amount.
- Will long-term capital gains rates rise, drop or remain as is? Currently, the top rate is 20 percent, plus the 3.8 percent net investment income tax, which applies to income above $250K for MFJ and $200K for singles. An increase would certainly hurt wealthier taxpayers, because they disproportionately benefit from this tax rate being lower than ordinary rates. That said, an increase in rate would be a bitter pill to swallow for the investment industry, which has powerful lobbyists on Capitol Hill.
- Will the plan repeal the Alternative Minimum Tax (AMT)? The government created the AMT to penalize higher-income taxpayers who used deductions and credits to wipe out tax liability. It's an alternative computation of the tax that is due, with different deductions, add-backs and flat rates. AMT has more recently ensnared upper middle class earners, who absolutely despise it.
- What will happen to gift and estate taxes? For some reason, Americans really hate this tax, even though the IRS reported that the number of estate tax returns filed has declined nearly 76 percent from 2006 to just 11,917 in 2015, primarily due to the gradual increase in the filing threshold. Although the proposal is not likely to repeal the tax, it may raise the exemption amount, which currently stands at $5.49 million for individuals and $10.98 million for married couples. If the threshold rises even more, we are wasting a lot of oxygen talking about a tax that may only impact fewer than 10,000 returns.
- How much will the tax cut cost? If the proposal adds to the current $20 trillion in national debt, some Republicans may have a hard time squaring a yes vote with their previous anti-debt/deficit rhetoric.
- What growth assumptions are factored in? Previous plans have relied on economic growth of three percent, about a half of a percentage point higher than we are currently experiencing. Administration officials and lawmakers have argued that higher growth would offset any lost revenue in the proposal, an assumption that even the most conservative economists don’t think can work.
- What happens to corporate tax rates? The administration had said that it would like the top rate to drop from 35 percent to 15 percent, but it now appears that it will probably be somewhere in the 20-25 percent range.
- Will there be a one-time tax holiday for corporate cash held overseas? Trump's tax plan outline included a one-time tax holiday on the estimated $2.5 trillion of corporate cash held overseas. A holiday would lower the U.S. rate (10 percent was floated) to prod companies to bring home (repatriate) that money.
- What happens to pass-through income? Trump’s tax plan argued that “pass-through” income earned from partnerships, S corporations, limited liability companies and sole proprietorships would be taxed at 15 percent, the rate he advanced for corporations. Even if it were to drop to 20 or 25 percent, it would be far below the 39.6 percent top rate that now applies to pass-through income and a likely windfall for the wealthy.