Earlier in the year, with then-President-elect Trump optimistic about tax changes, we expected to now have more details on his tax reform plan. After all, tax reform was high on his legislative agenda. What we have achieved in recent weeks could be described as a starting point for negotiations. It is fair to mention that changes of this magnitude will not be made overnight, the last tax reform under Ronald Reagan in 1986 took more than two years.
What we know so far is that on individual taxes, it still requires three tax rates of 10%, 25%, and 35%. And while this is an adjustment from his previous plan of 12%, 25% and 33%, the simplification of the tax brackets remains. On the corporate side, you still want a 15% rate for regular corporations and transfers like LLCs and Scorps. A Senate bill for S-Corporations is already in the works. One interesting aspect of this bill is the easing of the rules for former C-Corps with retained earnings electing S-Corps status. As of now, if more than 25% of the gross income is passive, the company is penalized with a 35% tax on the excess, it could also lose its S-Corp status if this happens over a period of 3 years. This new bill will increase this threshold to 60%. The proposed bill will also allow IRAs to be S-Corp shareholders and streamline the S election process. If this really works, we may not need to file Form 2553 again.
All these tax cuts are sure to add to the already massive federal debt, the question remains how Trump will pay for all the proposed tax cuts. One of the supposed ways to balance the budget could come with the reduction of tax benefits for retirement savings. If they stopped IRA contributions and instead forced taxpayers into a Roth IRA, they would end IRA contribution deductions and increase revenue that could cover some of these tax breaks. Another possible way could be to freeze the current contribution limits for retirement plans by not keeping up with inflation adjustments.
Although White House officials have assured the public that retirement savings will remain intact, many in the industry think otherwise. Without a border adjustment tax and no other revenue being generated, it is hard to see how Trump’s proposed tax cuts could be carried out. Unless they plan to cut tax breaks for retirement plans like we mentioned earlier. What could eventually end up happening is a temporary tax cut for businesses and individuals, which might be a solution for now, but won’t sit well with business owners looking for a more permanent solution.
As we stand today, the possibility of major tax reform seems remote, especially since Congress can’t seem to find a way to find revenue sources to offset the proposed tax cuts. Business owners and investors will likely have to wait until next year for major tax reform.