Dear Clients and Friends:
Republican lawmakers released a framework for tax reform on September 27, announcing that their goals are to cut tax rates, simplify the Internal Revenue Code, and to provide a more competitive environment for business. The framework generally reiterates proposals made by President Donald Trump in April. Our intent here is to simply provide you with an objective overview of these proposed changes without any political bias. Only time will tell what, if anything, proceeds to be enacted.
While the framework provides tax reform targets, it does not provide legislative language, which would still need to be developed in the congressional tax-writing committees. Republicans have announced that their goal is to have tax reform legislation enacted by the end of the year, but we view that as unlikely, or at least without significant debate and compromise.
For individual taxpayers, the framework calls for:
- Three tax brackets: 12%, 25%, and 35% (currently there are seven brackets, with the lowest one being 10% and the top one being 39.6%). However, the framework allows congressional tax-writing committees to add a fourth, higher bracket for high-income individuals. The income levels at which the three brackets would apply were not specified.
- Repeal of the alternative minimum tax.
- Repeal of the estate tax and the generation-skipping transfer tax.
- Taxing pass-through income (from S Corporations, and Partnerships) at a maximum rate of 25%. (The tax-writing committees would be given the task of developing rules to ensure that high-income taxpayers and professional practitioners do not use this provision to avoid the 35% bracket.)
- Consolidating the standard deduction and personal exemptions into a larger standard deduction of $12,000 for individuals and $24,000 for married couples filing jointly.
- Increasing the child tax credit and providing a $500 credit for care of non-child dependents.
- Eliminating most itemized deductions, including the deduction for state and local taxes, while preserving the deductibility of mortgage interest and charitable contributions. The framework directs Congress to maintain tax incentives for higher education, retirement savings, and employment.
For businesses, the framework calls for:
- As mentioned above, establish a top pass-through tax rate of 25%.
- Establishes a top corporate income tax rate of 20%.
- An end to taxation of U.S. companies ‘ worldwide income and a move to a territorial system. The tax-writing committees would have discretion to write anti-base-erosion measures.
- A one-time tax on accumulated offshore earnings, which would be taxed at two unspecified rates: One rate for cash and cash equivalents and a lower rate for other assets.
- Limiting the deductibility of interest.
- Eliminating certain deductions, at the tax-writing committees’ discretion, but the framework calls for
the research and low-income housing credits to be retained.
- For five years (or more), allowing 100% expensing of the cost of depreciable assets, except for
The above points are obviously lacking details, but some, such as eliminating estate & gift taxes and the lower corporate tax rates, are significant if not radical, in relation to current tax law. We understand the conundrum of how to tax pass-through income from partnerships and Subchapter S corporations that is related to business activity, as compared to investment income, has been a huge challenge to those developing these proposals, given that the majority of American closely-held businesses operate as pass- through entities. This is one aspect we urge anyone potentially affected by these proposed changes to keep an eye on.