At the end of May, President Trump released his 2018 federal budget proposal. While far from a final document, it begins discussions in Washington about which programs are considered priorities and how much funding federal agencies will receive. His budget also gives insight into what might be on the table later with comprehensive tax reform.
When it comes to taxes, the budget aims to lower individual and business tax rates, eliminate the Alternative Minimum Tax (AMT), and the federal estate tax. The AMT, which increases taxes owed for certain taxpayers, has been criticized for negatively affecting middle-income families. The federal estate tax is assessed on assets above $5,490,000 for 2017, and the top rate is currently 40 percent. States also levy their own estate taxes, which vary.
Here’s a quick rundown of the federal budget proposal’s tax implications:
Taxes on the Chopping Block
- Net Investment Income Tax (3.8 percent above income thresholds)
- Federal estate tax (currently 40 percent at the top rate)
- Special interest tax breaks for businesses and wealthy taxpayers
- Most Affordable Care Act-related taxes, including the employer and individual mandates
Tax Deductions Here to Stay
- Mortgage interest deduction
- Charitable giving deduction
- Retirement savings credit
- Individuals: Total tax brackets reduced from seven to three, and the top tax rate of 39.5 percent reduced to 35 percent
- Businesses: A proposed reduction on the highest tax rate of 35 percent to 15 percent for small and medium businesses and corporations
Expanded Tax Breaks
- Doubles the standard deduction
- Child and dependent care credits and childcare deductions
Additionally, the President expressed a desire to provide up to six weeks of paid federal leave for new mothers, fathers, and adoptive parents through unemployment insurance. He also hopes to transition to a territorial tax system, which would tax domestic income but not foreign income. During the transition, taxpayers with foreign-earned profits would see a one-time, as-yet-determined tax on existing profits.
With a projected 4.1 percent reduction in federal funding, the Department of Treasury will focus on collecting revenue, managing debt, and protecting the U.S.’s financial system from financial crimes and cyber threats. Under the budget proposal, the IRS’s focus would be on fighting identity theft and fraud. The IRS would also have greater authority to correct errors on taxpayer returns and regulate return preparers.
Small Business Administration Impact
The Small Business Administration (SBA) may be bracing for a five percent reduction in federal funding. The President’s goals for the SBA are to reduce regulatory and tax burdens and increase agency efficiencies. Up for elimination are SBA grant programs seen as redundant with the private sector, such as technical assistance grants, Regional Innovation Clusters, and Growth Accelerators. Existing funding for loan guarantees and microloan financing would remain about the same.
The budget released last month was not comprehensive and only included information on discretionary funding proposals. Of the 18 federal agencies highlighted in the President’s budget proposal, just three can expect funding increases. Four agencies could experience cuts of five percent or less. According to the White House, the full budget that’s yet to be released will contain “specific mandatory and tax proposals, as well as a full fiscal path.”
So far, Congress has shown cautious optimism that it can work together to pass a federal budget by the start of the next fiscal year on October 1. Questions still remain, like specific details on tax reform and the fate of the Affordable Care Act, which contains several taxes targeted for elimination.
Even amid an uncertain tax landscape, the best way to prepare is by planning ahead. Contact our office for any questions on your business or personal tax planning.