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Sunday July 31, 2016

Washington News

Washington Hotline

Presidential Candidates' Tax Proposals

Editor's Note: With the conclusion of the conventions by both major political parties, the fall campaign is already underway. The nonpartisan Citizens For a Responsible Budget (CFRB) published a comprehensive review of tax proposals by the two major party candidates. While the election and the next Congress will also have major impact on any comprehensive 2017 tax reform bill, as an educational service to our readers your editor will publish this summary of proposals by the two major party candidates.

Tax Proposals from Hillary Clinton

The Clinton Campaign website emphasizes that she hopes to “close corporate tax loopholes” and make the “most fortunate” pay higher taxes. The increased revenue is to be used to assist the middle class with childcare, healthcare and college expenses.

1. Tax Deductions – For upper income taxpayers, the tax savings will be limited to the 28% bracket. For example, a taxpayer in the 39.6% federal bracket who deducts home mortgage interest would save at the 28% rate rather than the 39.6% rate. Charitable gifts will be excluded from this limitation. A taxpayer in the 39.6% bracket will receive the full benefit of his or her gift deductions.

2. Capital Gains Tax – Under the current system, short-term capital gain may be taxed at up to 39.6% plus the 3.8% Medicare tax, for a total tax rate of 43.4%. Capital assets held over one year have a top rate of 23.8%. The Clinton proposal changes holding period rules to require a full six year term for long-term capital gain status. The top rate of 43.4% would be paid on assets sold within two years. The rate would be gradually reduced between years two and six.

3. Minimum Tax – As has been proposed by businessman Warren Buffet, there is a 30% minimum tax on incomes over $2 million. In addition, those who earn over $5 million would face an additional 4% surtax on the excess amounts.

4. Estate Tax – The current $5.45 million estate exclusion amount would be reduced to $3.5 million. The 40% estate tax rate will be increased to 45%. There also are various limitations on valuation strategies and other methods for reducing estate tax.

5. Business Taxes – There will be higher taxes on the oil and gas industry. Some partnerships and other passthrough businesses would also have increased taxes. Banks with assets over $50 billion will make an additional payment each year.

Editor's Note: The Clinton Campaign indicates that it would use some of the revenue to cover up to $2,500 in annual college costs. There also are discussions underway on reducing tuition at State Universities for taxpayers with incomes up to $125,000. A portion of the tax savings will also be used for childcare and healthcare benefits.

Tax Proposals from Donald Trump

The Trump Campaign proposes to lower marginal rates, reduce tax deductions and hopefully stimulate economic growth. House Ways and Means Committee Chairman Kevin Brady (R-TX) stated that he has been discussing tax reform with representatives from the Trump Campaign. Brady noted, “I feel like on the area of tax reform, and how we get the economy going, there's a lot of common ground with Mr. Trump.”

1. Standard Deductions – The existing $6,300 deduction will be increased to $25,000 for an individual or $50,000 for a couple. With the large increase in the standard deduction, at least 50% of American workers will pay no federal income tax.

2. Individual Income Tax Rates – The Trump Campaign proposes three brackets of 10%, 20% or 25%. The Alternative Minimum Tax (AMT), estate tax and 3.8% Medicare tax will all be repealed.

3. Deductions – Reducing tax rates is accomplished through changing or eliminating many tax deductions. Persons in the 10% bracket would receive most of the current deductions. Those in the 20% bracket should benefit from about half of existing deductions. Deductions would be substantially limited for taxpayers in the 25% bracket.

4. Business Taxes – The top rate is reduced from the current 35% to 15%. This will require the elimination of most or all business tax deductions.

Editor's Note: Chairman Brady has published a fairly detailed outline of his potential 2017 tax reform bill. He has stated that his plan is to produce a revenue-neutral reform under the dynamic scoring rules. The political challenge with all tax bills with lower rates is that there is a very substantial limitation on itemized deductions. Because all who will lose their favored deduction will strongly defend their position, there will be a lively debate both this fall and next year.

Published July 29, 2016

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