The deadline to file your federal income taxes is still more than two months away. But it’s likely that for the past couple of weeks your mailbox has been filled with W-2’s, W-9’s, Form 1040’s, and other documents that serve as reminders that tax season is underway.
You might also be thinking about some of the tax plans presented during the most recent U.S. Presidential Election. Now that the election is over and Donald J. Trump is behind the desk in the Oval Office, it might be a good time to revisit his tax platform.
For individual tax payers, candidate Trump notably promised to pare down the number of federal income tax percentage brackets from seven to three. The result? Married couples filing their taxes jointly would be taxed at the following rates: 12 percent for couples earning less than $75,000 annually; 25 percent for couples earning more than $75,000 annually, but less than $225,000; and 33 percent for couples earning more than $225,000 annually. Single filers would be taxed at the following rates: 12 percent for individuals earning less $37,500 annually; 25 percent for individuals earning more than $37,500 but less than $112,500; and 33 percent for individuals earning more than $112,500 annually. On the business tax front, candidate Trump promised to reduce the corporate tax rate from 35 percent to 15 percent.
Now that candidate Trump is President Trump, what does this portend for individual tax payers and business owners? In the immediate, not much, simply because any proposed changes to the federal Internal Revenue Code need to be approved by Congress. Even if changes are approved this year, they will be reflected during the tax preparation process next year.
But if your job is to study the tax code and offer financial advice to individuals and business owners, it makes sense to pay attention to campaign promises made during presidential elections.
“With the new administration and what it sounds like the plans of Congress are, I think the overall tax rates are going to come down in 2017,” said Marcus Bowman, a certified public accountant (CPA) at Clifton Larsen Allen. “I mean, that’s a general expectation of the market. Obviously, this isn’t current law, right? All of it, to be fair, is still speculative. But we can look at the Trump tax plan, we can look at the plans of some of the Congressional folks, and what we are seeing is a downward movement.”
CPA Michael Schmidt, a principal at Bellevue-based Berntson Porter, and the company’s tax department director, agreed.
“Tax rates are likely to go down just based on campaign promises,” said Schmidt. “Trump has promised lower business and individual tax rates. Obviously, it’s got to be voted on. The bill hasn’t been drafted yet. But that’s what we hear and read. There’s likely to be rates going down. We just know that the writing is on the wall for that.”
Bowman said he is encouraging his clients to accelerate deductions as much as possible in order to get more “tax bang for the buck” should Congress approve any tax code changes.
Is it any more difficult to prepare taxes or offer financial advice when there is a change of administrations at the White House? Not really, according to Bowman and Schmidt. What does matter is the uncertainty around the timing of tax code changes.
“It doesn’t really make it difficult whether it’s a Democrat or a Republican,” said Schmidt. “What is (difficult) is when Congress has a tax bill in November and December and they don’t pass it, maybe leaving it to pass until January. When we are working with clients in November and December, trying to make business decisions, and we don’t know what the tax rules are going to be, it becomes difficult. If a bill gets passed in 2017 early enough, then we will know.”
Bowman noted that changes to the federal tax code are often small and incremental, not necessarily world-changing, but the changes proposed by President Trump could be major. “There are few times that the changes are sweeping enough to present serious difficulties,” he said. “I’m too young to remember the last time we had a revision that’s as big as what maybe this one is going to be. I guess that was in the Reagan administration. But I was too young to be preparing tax returns at that point.”