March was full of setbacks to President Trump’s legislative plans. Efforts to repeal and replace the Affordable Care Act (“ACA”) broke down, as the Republican majority in the House of Representatives could not provide sufficient support for the proposed bill. At least for now, Obamacare is still the law of the land. While House Speaker Ryan said that Republicans are still going to pursue a repeal of the ACA, there is currently no commitment to a timeline or what the specific legislation might look like.
Subsequently, Trump and his chief aides put their focus on the Internal Revenue Code; Treasury secretary Steven Mnuchin said the administration intends to get its tax plan through Congress before the lawmakers’ August recess or “right afterwards,” while Ways and Means stated that tax reform is “absolutely the top priority.”
Obamacare taxes remain
Failure to repeal the ACA means that the tax provisions in that law remain in place. They include:
Individual responsibility. Taxpayers are required to maintain minimum essential health insurance. Those without such coverage owe a penalty, payable on their federal income tax returns.
Net investment income tax. A 3.8% surtax applies to individuals, estates and trusts with income above certain thresholds. Income here is modified adjusted gross income (MAGI): basic AGI plus any foreign income you exclude. The 3.8% surtax may apply to single filers with MAGI over $200,000 and to couples filing joint returns with MAGI over $250,000. Those thresholds are not adjusted for inflation.
Again, the calculation is complex, taking both MAGI and net investment income into account. The effect, for some taxpayers, is to increase the amount owed to the IRS on investment income by 3.8%. A long-term capital gain that generally would be taxed at 15% might be subject to an 18.8% tax rate.
It is important to note that both Trump and Republican tax proposals have called for the repeal of the Net investment income tax (as well the surtax on earned income, as discussed below). Republicans had floated the possibility of retroactive repeal to January 1, 2017.
Surtax on earned income. Yet another surtax, 0.9% in this case, is added to the Medicare payroll tax paid by some individuals. The extra amount applies to earnings over $200,000 for single filers and over $250,000 for joint filers. Again, the thresholds are not adjusted for inflation. What’s more, this 0.9% surtax as well as the 3.8% surtax on net investment income have a “marriage penalty”; a couple filing jointly may owe more than the total owed by two single taxpayers.
“Cadillac” health plans. One provision of the Affordable Care Act is a 40% tax on employer-sponsored health plans that are deemed to be overly generous to employees. Implementation of this tax has already been postponed from 2018 to 2020. A further extension is possible, but for now this steep tax is something for employers to consider, if they provide such health insurance to employees.
Soon after the effort to repeal and replace Obamacare expired, Trump announced he would make tax reform a priority. The main thrust would be lower income tax rates on individuals. In addition, the corporate income tax rate would drop sharply from the current 35%, perhaps as low as 15%. Other aspects of the plan include tax simplification. The complicated alternative minimum tax (AMT) would be repealed, for individuals and for corporations. Personal exemptions would be repealed and the standard deduction would be increased from the current $6,300 (single) and $12,600 (joint returns) to as much as $15,000 and $30,000.
In addition, White House chief of staff, Reince Priebus, recently stated that the President supports a border-adjustment tax. If proposed and passed, this provision could tax imports and exempt exports, raising revenues that might allow the desired tax cuts to pass through Congress.
Democrats have warned that the Administration should learn from its failed attempt to repeal the ACA, and should focus on areas that would garner broad bipartisan agreement. Commenting specifically on border tax adjustment, the perceived fear is that this tax could lead to the “same divisive and wasteful process”. Ryan and Brady, however, as proponents of the provision, remain committed to border tax adjustment. Senate Finance Committee Chairman, Orrin G. Hatch, has announced that he is open to a tax reform package that is temporary and not revenue-neutral.
Accumulation of overseas earnings has been a contentious issue for both Republicans and Democrats. A report from the Institute on Taxation and Economic Policy estimated the deferral in taxes to exceed $700 billion for Fortune 500 corporations. Proposed tax reform would allow corporations to repatriate these funds at a rate of 10%.
The bottom line is that we’ll have to wait and see all the details of Trump’s promised tax reform. The ACA repeal failure highlights the perilous nature of proposals - whether the legislation will pass or not. The uncertainty of tax proposals presents a challenge in terms of proper tax structuring. Our advice, while based on current law, certainly incorporates the possible consequences of tax reform proposals. No matter what happens on future tax legislation, we will keep you informed on a timely basis.
Citrin Cooperman’s Federal Tax Policy Team
As the Trump tax plan rolls out, Citrin Cooperman’s Federal Tax Policy Team (FTPT)
will continue to keep our clients abreast of the constantly changing legislative and political landscape. This team will examine new tax legislation as it is enacted, in order to identify strategies to help our clients best manage the complexities of their tax situations.
With a highly knowledgeable and experienced team, the FTPT
is uniquely qualified to assist as our clients tackle key tax issues. The team’s primary focus is on President Trump’s administration, subsequent legislation, and helping our clients learn about, understand and plan under any new tax legislation.