tax update: 2016 & beyond

Questions?

Mark Heath• Partner• CPA• [email protected]

Ryan Rutt• Senior Tax Manager• CPA• [email protected]

Tax Update: 2016 & Beyond

Mark Heath, PartnerRyan Rutt, Senior Tax Manager

Introductions



Federal Tax Update•Recent legislation•Candidates’ tax plans• Tax “expenditures” – what should tax

policy look like?

PATH Act of 2015Permanently Extended Business Provisions

– Section 179 expensing - $500,000 ($2M investment limitation)

– 15 year recovery for leasehold/retail improvements and restaurant property

– 5-year recognition period for S-corp built-in gains

– S-corps charitable contributions of property

– Research tax credit

PATH Act of 2015Permanently Extended Individual Tax Provisions

– IRA distributions to charity

– 100% exclusion of gain on small business stock

– State and local sales tax deduction

– Teachers’ classroom expense deduction

– Enhanced child tax credit

– Enhanced American Opportunity Tax Credit

PATH Act of 2015Non-Permanent Extenders

– Bonus Depreciation– 50% through 2017– 40% for 2018– 30% for 2019

– Extended through 2016– Exclusion of COD income on principal residence– Deduction for mortgage insurance premiums– Deduction for qualified tuition expenses– Alternative fuel credit

– Extended through 2019– Work opportunity tax credit

Other Federal Tax Legislation• Surface Transportation and Veterans Health Care Choice

Improvement Act of 2015• Revised tax return due dates• Effective date• Revised extended due dates

Other Federal Tax Legislation• Omnibus Appropriations Act• Delay the “Cadillac Tax” for two years – from 2018 to 2020• Make the “Cadillac Tax” Deductible Against Income Tax• Suspend Health Insurance Tax for One Year

• Other IRS Rulings and Announcements

Candidates’ Tax Plans• Hillary Clinton*

• 4% surtax on income over $5 million• Minimum 30% rate on individuals earning over $1 million• Cap on benefit from itemized deductions• Strengthen rules against “inversions” by imposing an “exit tax” on unrepatriated earnings• Institute a “medium-term” capital gain category• Increase estate tax rate to 45% and lower exclusion to $3.5 million• Establish business tax credit for profit-sharing and apprenticeships• Establish tax on high-frequency financial transactions• Tax carried interest as ordinary income

*TaxFoundation.org

Candidates’ Tax Plans• Donald Trump*

• Establishes four tax brackets, with rates of 0%, 10%, 20% and 25%. The top rate applies to income over $150,000 for single filers and $300,000 for joint filers.

• Phases out all deductions except for the charitable deduction and the mortgage interest deduction.

• Eliminates the alternative minimum tax.

• Eliminates the net investment income surtax.

• Lowers the top corporate rate to 15%.

• Ends the deferral of overseas corporate income but preserves the foreign tax credit. Enacts a deemed repatriation of foreign income at a 10% rate.

• Taxes pass-through business income at 15%.

• Eliminates the estate tax.

• Places a "reasonable cap" on the deductibility of interest against the corporate income tax.

• Taxes carried interest at ordinary income rates.

*TaxFoundation.org

Candidates’ Tax Plans• Bernie Sanders*

• Establishes four new brackets of 37%, 43%, 48%, and 52%. The top rate applies to taxable income over $10 million. Raises the rate of all other brackets by 2.2%.

• Caps the tax benefit of itemized deductions at 28% of the deduction. Eliminates the Pease limitation on itemized deductions.

• Eliminates the alternative minimum tax.

• Taxes capital gains and dividends at ordinary income rates for households with incomes over $250,000.

• Ends the deferral of tax on foreign income. Creates several limits on the foreign tax credit. Revises rules about corporate inversions and foreign corporations operating domestically.

• Raises the employer-side payroll tax rate by 6.2%. Applies the Social Security payroll tax to earnings over $250,000. Creates a new payroll tax of 0.2%, to fund paid family leave.

• Increases the top estate tax rate to 65%, and lowers the estate tax exclusion to $3.5 million.

• Establishes a financial transactions tax, at a rate between 0.005% and 0.5%, with an offsetting credit for low-income Americans.

• Taxes carried interest at ordinary income rates.*TaxFoundation.org

Candidates’ Tax Plans• Ted Cruz*

• Establishes a flat rate of 10% on all ordinary income. Increases the standard deduction to $10,000 per filer.• Eliminates all itemized deductions except for the charitable deduction and the mortgage interest deduction.• Eliminates all credits except for the earned income tax credit and the child tax credit. Expands the earned income tax

credit by 20%.• Eliminates the Alternative Minimum Tax.• Lowers the rate on capital gains and dividends income to 10%.• Replaces the corporate income tax with a 16% business transfer tax, which applies to all capital income and labor

payments.• Shifts to a territorial tax system and enacts a deemed repatriation of foreign income at a 10% rate.• Taxes pass-through business income at 10%.• Eliminates the payroll tax.• Eliminates the estate tax.• Creates tax-free savings accounts for up to $25,000 of savings a year.

*TaxFoundation.org

Cruz’ “VAT” TaxSales Tax Cruz Tax

Farmer Sells Wheat $0.50 $0.50 Tax Rate 0% 16%Tax $0.00 $0.08

Baker Bakes Bread $1.50 $1.50 Less: Cost of wheat ($0.50)Value Created $1.00 Tax Rate 0% 16%Tax $0.00 $0.16

Consumer Buys Bread $2.00 $2.00 Less: Cost of bread ($1.50)Value Created $0.50 Tax Rate 6% 16%Tax $0.12 $0.08

Total Price to Consumer $2.12 $2.00 Total Tax Paid $0.12 $0.32 Price Without Taxes $2.00 $1.68 True Tax Rate 6% 19%

Candidates’ Tax Plans• Marco Rubio*

• Establishes three brackets of 15%, 25%, and 35%. The top rate applies to taxable income over $150,000 for single filers and $300,000 for joint filers.

• Eliminates all itemized deductions except for the charitable deduction and the mortgage interest deduction. Caps the mortgage interest deduction at $300,000 of acquisition debt.

• Establishes an additional child credit of $2,500, used to offset income and payroll taxes. Replaces the standard deduction, personal exemption, and 10% bracket with a refundable personal credit.

• Eliminates the alternative minimum tax.• Lowers the rate on capital gains and dividends income to 0%.• Lowers the top corporate rate to 25%.• Moves to full expensing of investment costs.• Shifts to a territorial tax system and enacts a deemed repatriation of foreign income at a 6% rate.• Taxes pass-through business income at 25%.• Eliminates the additional Medicare tax on compensation over $200,000.• Eliminates the estate tax.• Eliminates the head of household filing status. Removes interest income from the tax base, except for interest received by financial

institutions. Provides a new tax credit for businesses that offer paid family leave.*TaxFoundation.org

Candidates’ Tax Plans• Ben Carson*

• Establishes a flat rate of 14.9% on all ordinary income. Alters the standard deduction and personal exemption to exempt wage income under 150% of the federal poverty level of a filer.

• Eliminates all itemized deductions.• Eliminates all credits except for the foreign tax credit.• Eliminates the Alternative Minimum Tax.• Lowers the rate on capital gains and dividends income to 0%.• Lowers the top corporate rate to 14.9%.• Moves to full expensing of investment costs.• Shifts to a territorial tax system. Allows corporations to repatriate international income tax-free for six months,

provided they use 10% of the money in enterprise zones or to create jobs for the unemployed.• Taxes pass-through business income at 14.9%.• Eliminates the taxation of Social Security benefits and the deduction for the employer-side payroll tax.• Eliminates the estate tax.• Eliminates the exclusion of fringe benefits. Eliminates the deductibility of interest and exempts interest from taxation

for non-financial institutions.*TaxFoundation.org

Candidates’ Tax Plans• Jeb Bush*

• Establishes three tax brackets, with rates of 10%, 25%, and 28%. The top rate applies to taxable income over $85,750 for single filers and $141,200 for joint filers. Increases the standard deduction to $11,300 for single filers and $22,600 for joint filers.

• Eliminates the state and local income tax deduction. Caps all remaining deductions, besides the charitable deduction, at 2 percent of adjusted gross income. Eliminates the Pease limitation on itemized deductions.

• Doubles the Earned Income Tax Credit for childless filers, and expands it for filers between 21 and 24.• Eliminates the alternative minimum tax.• Eliminates the net investment income surtax. Taxes interest income at capital gains and dividend tax rates.• Lowers the top corporate rate to 20%.• Moves to full expensing of investment costs.• Shifts to a territorial tax system and enacts a deemed repatriation of foreign income at an 8.75% rate.• Exempts workers over 67 years old from payroll taxes.• Eliminates the estate tax and ends step-up basis in capital gains for estates.• Eliminates the deductibility of interest. Eliminates the personal exemption phase-out. Allows second earners to file

their tax returns separately. Taxes carried interest at ordinary income rates.*TaxFoundation.org

Candidates’ Tax Plans• Rand Paul*

• Establishes a flat rate of 14.5% on all ordinary income. Increases the standard deduction to $15,000 per filer. Increases the personal exemption to $5,000 per person.

• Eliminates all itemized deductions except for the charitable deduction and the mortgage interest deduction.• Eliminates all credits except for the earned income tax credit and the child tax credit.• Eliminates the alternative minimum tax.• Lowers the rate on capital gains and dividends income to 14.5%.• Replaces the corporate tax with a 14.5% business transfer tax, which applies to all capital income and labor

payments.• Moves to full expensing of investment costs.• Shifts to a territorial tax system.• Taxes pass-through business income at 14.5%.• Eliminates the payroll tax.• Eliminates the estate tax.

*TaxFoundation.org

Tax Expenditures

•What is a tax “expenditure”?

•Corporate vs Individual

• Effect on tax base vs preference

•What makes good tax policy?

Questions?

