Athletes Will Need Even More Guidance and Tax Planning Under the Trump Tax Plan
On April 26, the Trump Administration outlined its tax proposal on a one-page handout distributed to reporters. The highlights of the plan are:
- Reduce the current seven tax brackets to three;10%, 25% and 35%.
- Doubling the standardized deduction.
- Elimination of the 3.8% Net Investment Income Tax.
- Elimination of the Death Tax.
- Repeal of the Alternative Minimum Tax.
- Cutting the corporate rate from 35% to 15%.
ETA’s position is that the lack of details in the tax plan will result in a long road for comprehensive tax reform; however, since the market and political expectations have been set for lower taxes, a reduction in tax rates is a near certainty. Additionally, Secretary Mnuchin also indicated that “tax loopholes” for the wealthy would be eliminated; thus, resulting in higher taxes for many individuals without appropriate tax planning.
Another major criticism about the plan is how it is scored and its effects on the federal deficit. Secretary Mnuchin indicated that assuming GDP growth of 3% the plan, the plan would be revenue neutral if tax loopholes are eliminated. However, the Trump Administration did not reveal its methodology. ETA believes that without further information, the current plan would actually increase the federal deficit. The projected increase in the federal deficit ranges from $2.6 trillion (The Tax Foundation used dynamic scoring) to $10 trillion (Moody’s which took into consideration that an increase in the deficit will increase interest rates and drag investment).
Without any further guidance from the administration, ETA can make several broad assumptions about the coming tax landscape:
- Lower rates. More taxes. High income earners such as athletes may have lower personal tax rates in the future. But, they may also pay more total taxes due to the elimination of often used tax loopholes.
- Tax planning is even more vita With a reduction in corporate rates, athletes will need guidance on how they can recharacterize their taxable income into business income. Additionally, a legitimate business enterprise would need to be identified and established, which will also require counsel.
- People who live in states with high income taxes will feel the pain. If the standardized deduction is doubled (or if the federal deduction for state and local income taxes is eliminated), athletes who live in New York and California will lose a major deduction.
- Most of the tax burden will hit wage earners such as athletes. Eliminating unreimbursed job expenses while offering lower corporate tax rates will place most of the tax burden on wage earners who only report W-2 income. As most athletes only report wages, their collective tax burden will be disproportionally larger than business owners.
Due to the politics involved ETA cannot predict the particulars of the final tax plan. However, we are certain that taxes will be higher for wage earners than it is for business owners. It is crucial that athletes seek competent counsel so they can minimize their taxes.
