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Donald Trump’s victory coupled with what appears to be a Republican sweep of both houses of Congress sets the stage for tax legislation to be passed early in Trump’s term. As a frame of reference, significant tax legislation was passed late in the first year of Trump’s first term in office when the Republicans controlled both houses of congress.
This article will address both the extension of some of the 2017 tax provisions past their existing expiration date of December 31, 2025, as well as some of the President-elect Trump’s campaign promises.
Trump’s Campaign Tax Promises
- A reduced corporate tax rate for domestic production of 15% from the current 21% rate.
- Exempting tips, overtime pay and social security income from income taxes.
- Creating an itemized deduction for auto loan interest.
- Eliminating green energy subsidies.
- Raising current section 301 tariffs on China to 60%.
- Imposing a universal tariff on all U.S. imports of 20%.
The Tax Foundation estimates that while adding 597,000 full-time equivalent jobs, it will increase the federal deficit over ten years after 2025 by $3 trillion. Other organizations have estimated the increase at $5 to $6 trillion just from the extension of the 2017 Tax Cuts and Jobs Act (TCJA) provisions themselves.
Expiring Provisions Impacting Business
The TCJA allowed businesses to immediately deduct a large percentage of the purchase price of eligible assets such as machinery rather than requiring a more level write-off over the life of the asset.
For assets placed into service up through 2022, a 100% deduction was allowed in the year the asset was “placed into service”. The 100% deduction has been phasing down by 20% points a year until 2027 when it will no longer be available.
It is believed that Republicans will want to revive bonus depreciation as a means to incentivize domestic prediction in the U.S (coupled with a proposed corporate rate reduction).
Estate and Gift Tax Exemptions
The TCJA doubled the U.S estate and gift tax exclusion for each U.S citizen or resident from $5 million to $10 million, adjusted annually for inflation. For 2025, the inflation adjusted exclusion is $13.99 million.
The doubling of the estate tax exclusion is scheduled to expire at the end of 2025. With the Republicans in control, there is a good chance that the doubling of said exclusion will extend beyond 2025.
The GILTI Tax
U.S. controlled foreign corporations have been subject to a Global Intangible Low-Taxed Income (“GILTI”) since 2018. Under this tax, U.S. individuals and corporations which owned a non-U.S. corporation are subject to a U.S. tax on annual undistributed profits left in their foreign corporation(s) to the extent the tax paid by the foreign corporation on the active business income was less than 13.125%.
In general, the mechanics of the tax were that U.S. owners of an Ontario corporation fully utilizing the small business tax rate of 12.2% are subject to an approximate 1% tax on undistributed profits with an exclusion equal to 10% of the corporation’s investment in tangible, depreciable assets minus interest expense.
After 2025, the threshold for applicably of the GILTI tax is scheduled to increase from the current 13.125% to approximately 16.4% amounting to a closer to 5% tax on the undistributed annual income of U.S. citizen majority shareholders of Canadian corporations.
Commensurate with the prospective change to the GILTI rate, the Foreign Derived Intangible Income (“FDII”) rate which provides an incentive to domestic U.S. corporations in the form of a lower tax rate of 13.125% on profits derived from exports will increase to 16.4%.
Individual Tax Provisions
Under the TCJA, the child tax credit has been increased to $2,000 per qualifying child subject to a $200,000 income phase out for a parent filing a “married filing separate” tax return and double the income for a “married filling joint” return. In 2026, the credit is scheduled to revert to $1,000 per child with a $75,000/ $110,000 phase-out.
There are a number of other individual tax provisions scheduled to phase out after 2025 which should have minimal, if any, impact of U.S citizens resident in Canada because of the higher Canadian tax rates including the following:
- A change to marginal tax rates with the highest rate increasing from 37% to 39.6%
- A significant decrease in the standard deduction coupled with a revival of the personal exemption(s).
- Reversion of cash contribution threshold from 60% to 50%
- The state and local tax deduction cap of $10,000 will expire.
- Changes to allowable mortgage interest deductions, disallowance of miscellaneous deductions and the overall limitation on itemized deductions will revert to the pre-2018 rules.
Final Thoughts
Notwithstanding the fact that the Republicans have swept the election, there are at least three potentially significant impediments to the passage of a new tax bill:
- Deficit hawks in both houses of congress may hesitate to increase the national debt to a precariously high level of approximately 225% of GDP.
- Many economists believe that tariffs could exacerbate inflationary pressures.
- Many “blue state” Republicans from the states such as New York, New Jersey and California are under significant pressure from voters to repeal or not extend the state and local tax cap which would increase the deficit by over $1 trillion dollars in the subsequent ten years.
Prognosticating the likelihood of tax changes in the next year is difficult. Even more difficult is predicting what provisions will change and what provisions will remain intact.
Should you have any questions on this article, please contact Stanley Abraham (Partner), at sa@zeifmans.ca or 647-256-7551.
