What you need to know about Trump's tax plan

The Trump administration recently outlined its tax reform proposal for both individuals and businesses. The goals of the proposed reform are to spur economic growth and simplify the tax code. Key features call for reducing taxes by slashing corporate tax rates, flattening individual marginal income tax brackets, and repealing the estate and alternative minimum taxes.

A simplified tax code should be a welcome relief considering the amount of time and money spent to comply with the tax code. According to the National Taxpayers Union Foundation's annual analysis of tax complexity in the U.S., an estimated 6.1 billion hours is spent annually on compliance, resulting in an economic loss of $234.4 billion per year. The foundation's research indicates that of this total, $64.6 billion is attributable to lost productivity from 1.9 billion hours spent on the 1040 tax form series alone.

While the proposal still lacks many details, the Trump administration will meet with stakeholders to receive their input and continue working with the House and Senate to develop the plan. In the meantime, the proposal outlines the following broad changes.

Individual Taxpayers

The administration's plan reduces the number of tax brackets, the highest of which is currently 39.6 percent, from seven to three resulting in a 10 percent, 25 percent and 35 percent bracket. However, the proposal does not specify the taxable income levels associated with each bracket.

Taxpayers will also see a doubling in the standard deduction – $12,700 for individuals and $25,400 for married taxpayers. As such, individual and married couples making less than these amounts would pay no income tax. The proposal would eliminate all tax deductions, except those for a mortgage, charitable giving and retirement savings. Itemized deductions would be capped at $200,000 for married and $100,000 for single taxpayers.

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During his campaign, President Donald Trump proposed eliminating the personal exemption and the head of household filing status, the latter being costly to single parents. The administration's proposal did not address these two items.

The proposal would retain the existing 20 percent tax on long-term capital gains and dividends while eliminating the 3.8 percent tax on net investment income that became effective in 2013 to pay in part for the Affordable Care Act. Most savers' retirement assets are held in a tax-sheltered account, such as an employer 401(k) plan or IRA. As such, the reduction in capital gains will not affect these accounts directly.

The proposal would also repeal the alternative minimum and federal estate taxes.

Business Taxes

The proposal significantly lowers the top corporate rate from 35 percent to 15 percent with fewer deductions and credits. While Trump campaigned on extending the business tax rate to partnerships and other pass-through entities, the proposal did not specifically address this issue except to say that the rules would be put in place to prevent "gaming the system."

Businesses would be allowed to take an immediate deduction for purchasing capital assets. In return, the businesses would be required to forego interest expense deductions.

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The proposal calls for a territorial system of taxation to level the playing field for American companies, which generally would be excluded from taxation of foreign earned income. A "one-time tax" on corporate earnings realized and held overseas, and on which tax has been deferred, would be taxed at a 10 percent rate.

The goal is to enact tax reform by the end of this year. Assuming there will be tax relief beginning next year, the following tips can be used now to take advantage of lower future taxes:

Tax loss harvest. Instead of waiting until the end of the year to realize any losses, take the time now to review your portfolio for any investments that were purchased for less than their current value. You must wait a minimum of 31 days to repurchase the investment to avoid the wash sale rule. The loss on the sale can create two scenarios – it can offset gains from the sale of other securities or create a deduction against ordinary income.

Accelerate itemized deductions this year. If possible, pay or prepay itemized deductions that the administration wants to eliminate such as state and local tax payments, medical expenses and unreimbursed employee expenses by the end of the year.

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Shift income to next year. While investment decisions should be based on their own merits, consider waiting to sell investments with large gains until next year to avoid the net investment income tax or a shift into a higher current tax bracket. If you are self-employed, consider making capital purchases this year to offset income that will be taxed at a higher rate, or delay bonuses or other large receipts until next year.

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