April 27, 2017 Trump's tax reform plan could hold implications for employers On April 26, 2017, the Trump administration presented its tax reform plan calling for significant change in business and individual taxes. As it relates to individual tax reform, there are several potential implications for employers. Individual income tax rates, elimination of most itemized deductions In addition to doubling the standard deduction (which, if put in place for 2018, would increase the amounts for single taxpayers from $6,350 in 2017 to $12,700 in 2018), the plan calls for a reduction from the current seven tax brackets to just three. The supplemental income tax withholding rate on earnings over $1 million would drop from the current 39.6% to 35%.
The reduction in individual income tax rates comes with a trade-off — doing away with most itemized deductions. "We are going to eliminate, on the personal side, all tax deductions other than mortgage interest and charitable deductions. We think that will be sweeping reform," Secretary Mnuchin said. The principle behind removing itemized deductions, that is, simplifying the tax code, might extend further to a paring back of tax-free employer-provided benefits as proposed by the Senate Finance Committee in 2013. (See EY Payroll Newsflash, Vol. 14, #160, 6-3-2013.) A reduction in individual income tax rates can have a direct and favorable impact on employers as follows: — Businesses that pay employee income taxes on bonuses, taxable relocation, etc. (i.e., gross up) would see a reduction in compensation expenses. — Businesses that reimburse international assignees for their US income tax could likewise see a reduction in compensation expenses. Child and dependent care expenses Trump's tax plan also calls for providing relief for families with child and dependent care expenses. While details were not included in the April 26 plan, following were the provisions of the Child Care Plan outlined by the Trump campaign in September 2016. 1. Dependent care savings accounts (DCSA). Taxpayers would have the option of opening a DCSA to cover current and future childcare or eldercare expenses. Up to $2,000 per year of DCSA contributions would be exempt from taxation, and account balances would roll over from year to year so that taxpayers can accumulate savings for future expenses. DCSAs would be funded by immediate family members and/or employers. — DCSA for childcare. In addition to childcare expenses, withdrawals could be made from a DSCA by parents to enroll their children in a school of their choice or for other enrichment activities that prepare their children for their future. Any funds remaining in the DCSA when children reach age 18 could be used to fund their higher education expenses. — To encourage low-income families to establish DCSAs for their children, a federally-funded 50% match on parental contributions of up to $1,000 per year would be available. — DCSA for eldercare. Withdrawals would be allowed for an elderly dependent's adult day care, in-home or long-term care service expenses. 2. Six weeks paid leave for new mothers. The existing unemployment insurance (UI) system would be modified to include up to six weeks of paid leave for new mothers to care for their newborns. The Trump campaign estimated this added temporary unemployment benefit would cost an additional $2.5 billion annually at an average benefit of $300 per week. The Trump campaign suggested this cost could be recovered by reducing some $5.6 billion per year in improper UI benefit payouts and by implementing the proposals in the administration's fiscal year 2017 budget regarding program integrity. According to the plan document, by funding paid leave in this way "it will not be as financially onerous to small businesses when compared with mandating paid leave." 3. 100% above-the-line deduction for child care costs. Taxpayers would be allowed an above-the-line tax deduction for 100% of childcare costs incurred for children from birth to age 13. The deduction would be available to adoptive parents as well as foster parents who are legal guardians. The exclusion would be available for up to four children per family and would be limited to the average cost of childcare in the state of residence for the age of the child. — Expand eligible care givers. The exclusion would apply to a variety of different types of childcare — institutional, private, nursery school, afterschool care, and enrichment activities. The benefit would also be available to families whose caregivers are stay-at-home parents or grandparents. Ernst & Young LLP observations Throughout the month of May, the Trump Administration will hold listening sessions with stakeholders to receive their input and will continue working with the House and Senate to develop the details of a plan that can pass both chambers. The specifics of tax reform are certain to evolve over time with implications perhaps extending to fringe benefits. For these reasons, it is important that employers closely monitor developments as they unfold and prepare for the potential of last minute changes. ———————————————
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