Both Donald Trump and Hillary Clinton have made tax reform a key issue in their respective campaign platforms. As Election Day draws near, it is important to understand what a victory by each candidate may mean to employers and their business taxes.
While both Mr. Trump and Mrs. Clinton have voiced strong support for small business and the need to cut regulations and bureaucratic red tape, they have drastically different perspectives on how to accomplish this. The following outlines potential effects on personal and business taxes that either scenario could bring.
Tax Reform under Donald Trump
Donald Trump's tax plan proposes to reform the individual income tax code by lowering rates on wages, investments, and business income while broadening the individual income tax base. It would also lower corporate tax rates to 15 percent and modify the corporate income tax base.
Under Trump's tax reform plan, individual tax brackets would be decreased from seven brackets to three brackets, with income tax rates of 12 percent, 25 percent, and 33 percent. Standard deductions would increase from $6,300 to $15,000 for single filers and from $12,600 to $30,000 for married filers. The head of household filing status would be eliminated. The plan also calls for the elimination of personal exemptions and introduces other childcare-related provisions, such as creating credits for childcare expenses for lower-income families. The plan also calls for the elimination of the alternative minimum tax. As well, Mr. Trump's plan would eliminate federal estate and gift taxes.
Mr. Trump's tax reform plan would also have a significant impact on business income taxes. The plan calls for a reduction to the corporate income tax rate from 35 percent to 15 percent and would eliminate the corporate alternative minimum tax. He would look to set rates on long-term capital gains and dividends at 0 percent, 15 percent, and 20 percent. Notably, he is also planning to apply a 15 percent rate to the business income from sole proprietorships and income passed through to individuals from S Corps, LLCs, and partnerships. Firms who manufacture in the U.S. would be able to choose between full expensing of capital investments and the deductibility of interest paid, while eliminating the domestic production activities deduction and all other business credits - except research and development credits. He would allow companies to repatriate their foreign earnings at a rate of 10 percent. In addition, Trump intends to repeal the Affordable Care Act (ACA), effectively eliminating the tax increases that are associated with ACA.
Tax Reform under Hillary Clinton
Hillary Clinton's tax reform plan proposes to enact a number of policies which would raise taxes on individuals and businesses. The plan would create a four percent surcharge on high-income taxpayers by adding a tax rate of 43.6 percent for income over $5 million, and a 24 percent rate for qualified dividend and long-term capital gain income. The "Buffet Rule" would be enacted, establishing a 30 percent minimum tax on income over $1 million. All itemized deductions would be capped at a tax value of 28 percent. The plan also calls for a new $1,200 tax credit for caregiver expenses.
Mrs. Clinton's plan does not specifically lay out changes to corporate tax rates, although she does mention some type of reform. The plan talks about eliminating corporate inversions (when a company relocates its legal home to a lower-tax nation, or tax haven, usually while retaining its material operations in the United States) including an "exit tax" on U.S. companies' untaxed foreign earnings when they expatriate. The plan would eliminate the deductibility of reinsurance premiums paid by corporations to foreign subsidiaries and provides an exclusion from income for reinsurance recovered for any arrangement where the deduction was disallowed. Ms. Clinton has also said she would establish a $1,500 apprenticeship tax credit for each new worker that a company trains and hires, and a 15 percent tax credit for employers who share profits with workers.
Change is in the Air
Although no one can accurately predict either the outcome of the upcoming presidential election or the ability of either candidate to push their proposed tax reform agendas successfully through Congress, one thing is certain for both large and small employers alike: the introduction of a new presidential administration will mean change. This change must be actively monitored and quickly implemented by employers of any size in order to remain in compliance with the new tax laws.
About the Author
Stephen Dombroski is a Senior Compliance Risk Manager at Paychex - a leading provider of integrated human capital management solutions for payroll, HR, retirement, and insurance services for small and medium-sized businesses. As a 20-year Paychex veteran, he leads the Payroll Tax Compliance team with responsibility for overseeing the firm’s management of government tax agency relations at the federal, state, and local levels.