As our country prepares for the November Presidential elections, many have strong leanings toward one candidate or the other, while others are still undecided. In preparation for election season, both candidates – Hillary Clinton and Donald Trump – have recently filled in the details on their originally loosely defined tax plans. Not surprisingly, individuals weighing in on the tax proposals of both Clinton and Trump typically prefer one plan or the other depending on where they fall on the political spectrum. Clinton’s plans tend to appeal to those looking for equality and fairness, while Trump’s plans tout more simplicity and lower rates to spur growth. But what about the specifics? This week we’re examining the tax plans presented by each candidate so we can all be better informed come November.
Goodbye, Carried Interest
While the plans proposed by Trump and Clinton differ greatly in most areas, they do agree in getting rid of carried interest. “It was originally meant for real estate,” explains Tom Wheelwright, CPA, founder, and chief executive of accounting firm ProVision. “If you did something for a company and instead of getting paid you got an interest in the company, but only if certain things happened, the law takes the position that you received nothing so there is no taxable income. You’re getting paid not in future profit but in gain on the sale of the company, in the future, which is why it’s called ‘carried.’”
Gary DuBoff, a CPA and principal at Florida-based Top 100 Firm MBAF also weighed in, stating, “The tax revenues generated by eliminating preferential tax treatment on carried interests would be substantial. Care must be taken that any changes in this area are cautiously crafted so that the tax consequences to the middle-class entrepreneurs who invest their time and energy – sweat equity – with little capital invested…are not hurt intentionally.”
One thing is certain – under either candidate, we can kiss carried interest goodbye.
Key Points of Departure
Beyond carried interest, the candidates agree on very little when it comes to America’s taxes – though both tout their plans as beneficial to the middle class.
Clinton proposes to retain the current tax brackets of 10, 15, 25, 28, 33, 35, and 39.6 percent. She would also implement a “fair share surcharge” on multi-millionaires and billionaires and fight for measures such as the Buffet Rule, which would ensure that those who make more than $1 million per year pay at least an effective tax rate of 30 percent. According to Clinton, the 4 percent surcharge is meant to apply to “the two out of every 10,000 taxpayers making more than $5 million per year who are the most likely to benefit from tax planning. [This ensures] that the richest Americans pay an effective rate higher than middle-class families.”
Clinton would also retain the Obamacare 3.8 percent tax on net investment income, with the worst-case scenario (for a taxpayer) leading to a high of 47.4 percent.
In addition to a fair share surcharge, Clinton intends to shut down the “private tax system” for the wealthiest, starting by closing specific egregious loopholes and, in her words, “remaining vigilant for new loopholes lawyers and accountants try to find next.”
Trump’s plan on the other hand, “removes nearly 75 million households – over 50 percent – from the income tax rolls.” He proposes to accomplish this by raising the standard deduction to about four times the current levels for single and joint filers.
Other Americans will receive a simpler Tax Code. Trump says he will work with House Republicans using the same brackets they have proposed: 12, 25, and 33 percent. According to Trump, “This new Tax Code eliminates the marriage penalty and the Alternative Minimum Tax while providing the lowest tax rate since before World War II.”
Because Trump plans to repeal Obamacare, there would be no tax on investment income. The “average cost of childcare spending” would be fully deductible.
Businesses, large or small, could expect to pay tax at the same rate of 15 percent under Trump’s plan. According to Trump, this lower rate would end corporate inversions, and cause trillions of dollars to come back into the country. Additionally, his plan would impose a one-time favorable rate of 10 percent on repatriated funds.
Capital Gains
In terms of capital gains, Clinton has called for raising rates for short-term trading in order to encourage long-term investment. Under her plan, the top rate on capital gains would stay at 39.6 percent for a second year, and would then by lowered on a sliding scale over the next four years. In order to be taxed at the current favorable rate, an investor would have to hold the investment for six years. Clinton’s intentions are to counter what she calls “quarterly capitalism.”
Trump would cap taxes on dividends at 20 percent. His plan also reduces the corporate tax rate from 35 percent to 15 percent, but would eliminate most business deductions and end the ability of corporations to defer taxes on income earned abroad. He would cap the deductibility of business interest expenses at what he feels is a “reasonable” amount, and would allow a one-time repatriation of overseas earnings at a 10 percent tax rate.
This is just the tip of the iceberg when it comes to each candidate’s tax plans, but should help shed some light on some of the most basic foundations of each proposal as we prepare for the November elections. In the meantime, if you have questions about your own taxes – we are here and ready to help. Be sure to browse our services page and fill out the form for a free consultation. Or give us a call at 844-841-9857!