The Trump Administration just released its Unified Framework for Fixing Our Broken Tax Code. This Framework outlines general principles for tax reform. There is still a long way to go in the legislative process, but based on what we have seen so far, here are some general thoughts on how these policies might affect you or your business:
Lowering the Tax Burden on the Middle Class
The proposal seeks to consolidate the current seven tax brackets into three brackets of 12%, 25%, and 35%. Currently the highest individual rate is 39.5%. The proposal provides tax relief to middle class families by roughly doubling the standard deduction to $24,000 for married taxpayers filing jointly (up from $12,600) and $12,000 for single filers (up from $6,300). The standard deduction is the amount of income that is not subject to federal income tax. A tax filer may choose to take the standardized deduction or to itemize his or her deductions.
Increases in other tax credits such as the child tax credit and additional tax relief will be decided through the legislative process. While most itemized deductions will be eliminated, tax incentives for home mortgage interest and charitable contributions will remain. The proposal also leaves the door open to add an additional top rate above the 35% rate if necessary.
The Proposal aims to eliminate the alternative minimum tax (“AMT”). The AMT is a federal supplemental income tax imposed on certain taxpayers in addition to their regular income tax. It was first enacted to prevent those with very high incomes from using special tax benefits to pay little or no tax. However it has since been expanded to reach individuals without very high incomes or those who do not claim special tax benefits and creates significant complexity in the Tax Code.
Elimination of the Death Tax and Generation Skipping Tax
The proposal also repeals the federal death tax and the generation-skipping transfer tax. However, currently the estate tax exemption is $5.49 million for an individual and $10.98 million for a married couple and applies to a limited number of people. The threshold amounts for an estate to go through probate in California still remains at $150,000 in assets or $50,000 in real property value.
New Tax Structure for Small Businesses
The proposal creates a new tax structure for small businesses including limiting the maximum tax rate applied to business income of small and family-owned businesses conducted as sole proprietorships, partnerships, and S corporations to 25%. The proposal also reduces the corporate tax rate to 20% which is below the average corporate tax rate of the industrialized world and would allow businesses to immediately write off the cost of new investments in depreciable assets other than structures made after September 27, 2017.
Other goals of the proposal include to partially limit the deduction for net interest expense incurred by C corporations, eliminate the current-law domestic production (section 199) deduction, preserve business credits in research, and development and low-income housing, and modernize the rules for certain industries and sectors.
Repatriating Foreign Assets
The proposal exempts foreign profits repatriated to the United States and 100% of dividends from foreign subsidiaries in which a U.S. parent owns at least a 10% stake. Foreign earnings that have accumulated overseas will be treated as repatriated. Accumulated foreign earnings held in illiquid assets will be subject to a lower tax rate with payment of any tax liability being spread out over several years.
As mentioned, this proposal is likely to change as it goes through the legislative process. But, it’s a good starting point to understand how the proposed reforms may affect you.