A Taxing Issue: Explaining Trump’s Tax Implications

By Brian O'Connell

At first glance, President Donald J. Trump’s tax plan looks highly favorable to financial consumers, especially affluent ones.

But a reality check may be in order. Meanwhile, political and tax experts await what will survive, and what won’t, after Congress sinks its teeth into the plan.

The tax plan, released on April 28, unveiled what the Trump administration called “core principles” (translations – tax cuts that will be hotly debated in Congress and the media). The proposal includes the following changes to the federal tax code:

• The business tax rate declines from 35 to 15 percent for corporations, while the top tax rate for so-called pass through (think partnerships and sole proprietorships) falls from 39 to 15 percent.
• The individual tax code changes, as well. The current seven individual income tax rates would be reduced to three: 10, 25 and 35 percent.
• The federal tax code standard deduction is doubled under the Trump plan.
• The alternative minimum tax is repealed under the Trump plan.
• The 3.8 percent net investment income tax, which was signed into law as part of the Affordable Care Act, is repealed.
• The estate tax is repealed.

A host of tax breaks will be eliminated under the Trump tax plan, but tax breaks linked to homeownership, charitable giving, and retirement funds will likely remain in place.

“The Trump plan is favorable to corporations as it reduces corporate tax rates to 15 percent,” noted David Hryck, a New York City-based tax lawyer. “Trump's plan also ‎provides a repatriation ability for corporations to bring back earnings that are currently being housed in foreign countries. Under the new plan these earnings will only be taxed at 10 percent.”

Trump's tax goals closely mirror those of Republicans, which control both houses of Congress. However, the GOP does not have a fillibuster-proof majority, so Democrats will wield some power over any tax bill.

Adding Company Value

The reduction in corporate tax rates would make company stock far more valuable and therefore benefit investors in creating more wealth, Hryck said.

“Estimates claim that $2.5 trillion is being housed by companies in foreign countries, bringing back pieces of this sum will surely benefit the stock of these companies while rewarding investors,” he explained.

One negative of Trump's plan is that he doesn't reduce the capital gains rate for individuals, Hryck said. “However, investors could accrue more wealth through value creation from lower tax rates on corporations.”

Investors will also benefit in more indirect ways if the Trump plan clears Congress.

Several taxes may be eliminated and could be a help to investors, including the 3.8 percent Obamacare tax, the .9 percent additional Medicare payroll tax, the Alternative minimum tax (AMT), and estate tax, said John Piershale, a wealth advisor at Piershale Financial Group in Crystal Lake, Ill.

“Some other things that will help investors are the possible doubling of the standard deduction, going from seven tax brackets down to three, and helping families with child and dependent care expenses,” he added.

Generally any kind of tax cut, tax credit, or increasing of deductions will help investors. So the doubling of the standard deduction, and the above-mentioned tax cuts will put more money into the hands of the private sector and away from government bureaucrats, Piershale said.

“The federal government has an incredible history of ineptitude when it comes to taking money from the private sector and spending it,” he said. “The problem is the other side of the ledger, where they will have to figure out how to balance conflicting interests of reducing a growing national debt while implementing tax reform.”

Gunning for State and Local Taxes

The Trump plan takes dead aim at state and local tax breaks, as well.

“Republicans want a revenue neutral tax plan. For this to happen while cutting taxes, they plan to get rid of some tax breaks to help cover the cost, like state and local tax deductions,” Piershale said. “This could be a challenge to pass because some states have higher state and local taxes, like New York, while some like Texas, have pay no local income tax, and will be a tough sell for states like New York, New Jersey and California.”

Overall, the proposed ‘core tax principles’ coming from the White House offers myriad benefits for financial advisory clients, especially on the small business and investing side.

If, that is, those principles pass muster in Congress.

Brian O'Connell is a former Wall Street bond trader, and author of the best-selling books, The 401k Millionaire and CNBC's Guide to Creating Wealth. He's a regular contributor to major media business platforms, including CBS News, The Street.com, and Bloomberg. Brian may be contacted at [email protected]