A Syndicator's Analysis of the Trump Tax Plan

As you are aware, House Republicans released details of the Trump tax plan known as the "Tax Cuts and Jobs Act" last Thursday. An 82-page summary of the bill prepared by the Ways and Means Committee is available here (full text of the 429-page Bill is available here).

I am not a tax professional but spent some time reviewing the bill and here is my analysis of the major provisions.

PERSONAL TAXES:

In broad strokes for individuals, the bill replaces the seven current tax brackets with four brackets that will reduce taxes for any given income level. The bill also increases the standard deduction (almost doubling it to $24,000 for married couples), eliminates the limit on itemized deductions and eliminates the AMT. The exemption for the estate tax or "Death Tax" doubles to $10 million and the tax will be repealed in 2023. Business income for individuals is capped at 25% for "pass-through" entities (such as most syndications). So far so good.

However, the bill also reduces or eliminates many deductions that are very valuable to upper-middle class taxpayers. The state and local taxes (SALT) deduction is eliminated except for up to $10,000 of property taxes on one's primary residence. Also eliminated in the new bill are personal exemptions. Mortgage interest has new limits on deductibility, namely, only first mortgage debt on primary residence up to $500,000 would be deductible, and only when used for acquisition (or a refinance of acquisition debt prior to November 2, 2017). It appears that interest on refinancing debt after November 2, 2017 will NO LONGER be tax deductible. Likewise, the deduction for home equity interest is eliminated. Several other deductions are also eliminated, including alimony, adoptions, disaster losses, medical, etc.

HOW MY FAMILY FARED UNDER THE NEW TAX PLAN:

I did an analysis on my 2016 personal taxes and found that the loss of deductions and exemptions (for my 5-person family, with more than $10,0000 in property taxes, in a high tax state - IL, with AMT) exceeded the savings from the lower tax brackets by a small amount. My taxes would have gone up less than $500, increasing my effective tax rate by 0.2%.

CALCULATE HOW YOUR TAXES WILL CHANGE:

You can calculate your own tax liability under the Trump Tax Plan using your 2016 Tax Return. First take your adjusted gross income (Liine 37). Then, if you took the standard deduction, use $24,000 as your new standard deduction. Otherwise, if you itemized your deductions on Line 40, go to Schedule A and find where your deductions will be reduced under the new plan (you must do some research here, in my case it was the property taxes in excess of $10,000, state income taxes, and HELOC mortgage interest). Then change Line 42 to zero since personal exemptions are no longer allowed. With these three numbers you can calculate your taxable income. Then to calculate your tax liability, find your liability in the 12% bracket (up to first $90,000), the 25% bracket ($90,001 to $260,000), the 35% bracket if you are lucky ($260,001 - $1,000,000) and the 39.6% bracket if you are in the top 0.1%. Then add your tax from these brackets together. Finally, you can eliminate the AMT if you paid it in 2016. But keep your self employment tax (as far as I can tell, this will not change). Then you have your total taxes for 2016 under the new tax plan. How did you do?

Note, you may have to remove capital gains, dividends and other special income and calculate these taxes separately. Also note, these numbers are for married filing jointly.

BUSINESS TAXES:

Corporations will make out much better with a reduced tax rate of 20% (down from 35%), the elimination of corporate AMT, and the ability to depreciate capital investments quicker (or expense them in the first year). These benefits are offset by reduced deductions on interest (for large companies) and carry forward losses.

Presumably, these corporate tax benefits will spur investment by corporations to create jobs. Putting more people to work will stimulate our consumer demand-driven economy.

Additionally, the corporate tax reduction will increase earnings for publicly-traded companies, which should in turn increase stock prices. This will benefit investors in the stock market as well as most investment-based savings plans (401k, IRA, pension plans, etc) that are owned by a large percentage of Americans in all tax brackets. I would caution that it is likely that a portion of this increase in earnings has already been priced into the stock market (as part of the recent run-up in the indices) and the tax plan is far from being a "done deal". In fact, the loss of the SALT and mortgage interest deductions is being fought fiercely by two of the largest special interest groups in Washington: Bankers and Realtors. So if/when problems arise in the passage of the tax bill or if significant changes are made (such as raising the corporate tax rate) there is a risk of a substantial negative reaction by the market.

EFFECTS ON SYNDICATORS:

In general, syndicators and private placement investors will benefit from the 25% "pass-through" maximum tax rate and will not be hurt by limitations on deductions for business interest (assuming less than $25M in revenue) nor the elimination of SALT deductions that will affect individuals (ie the $10,000 limitation on deducting property taxes).