The Trump Administration and certain members of Congress recently released an ambitious, conceptual plan for tax reform that would drastically alter current U.S. tax law, affecting a wide array of taxpayers. The plan (called the Unified Framework for Fixing our Broken Tax Code), much like President Trump’s plan released earlier this year, does not contain abundant details. In its broad outlines, however, it is clear that this effort will attempt to impact long-standing elements of the federal tax code as well as substantially lower and/or eliminate rates across a broad swath of taxpayers.
Significant elements of the plan include:
- Under the plan, the top corporate tax rate drops from 35 percent down to 20 percent.
- The corporate alternative minimum tax (AMT) is eliminated.
- Net interest expense deductions are “partially limited,” although the plan leaves out any further detail.
- True to its name, the plan also calls for the repeal or restriction of “numerous other special exclusions and deductions,” although certain business credits are retained (such as the credit for research and development).
- The plan also looks to “modernize” the rules of various special tax regimes that apply to certain industries and sectors.
Individuals and Families
- The plan seeks to simplify the tax code in a number of ways.
- Instead of the seven tax brackets currently in place, the plan reduces that number to three, calling for a 12 percent, 25 percent, and 35 percent bracket. Although not definitive, the plan suggests that an additional tax rate may apply to high-income taxpayers (perhaps in the form of a surtax).
- The plan increases the standard deduction to $24,000 for married taxpayers filing joint returns, and $12,000 for single filers. As a result of this larger standard deduction, personal exemptions are eliminated.
- The individual AMT is eliminated.
- Most itemized deductions are also eliminated, except for the deductions permitted for home mortgage interest and charitable contributions. The plan also retains tax benefits “that encourage work, higher education, and retirement security.”
- The Child Tax Credit will increase.
- The plan does not discuss what will happen to those tax provisions related to the Obama Administration’s Affordable Care Act (i.e., the 3.8 percent surtax on certain investment income, along with the 0.9 percent additional Medicare tax on high-income earners).
- The plan calls for a new tax system for certain entities.
- The maximum tax rate imposed on the business income of “small and family-owned businesses conducted as sole proprietorships, partnerships and S corporations” will be 25 percent.
- There has already been much speculation about this provision of the plan, and the new framework directs committees to adopt measures preventing wealthy taxpayers from abusing the system (i.e., by converting personal income into business income).
- Also of interest is the “expensing” provision of the new plan, which allows business to “immediately write off” the cost of new investments in certain depreciable assets for at least five years.
International Tax Reform
- The new plan aims to make America more competitive in the international business arena.
- Dividends received from foreign subsidiaries are fully exempt from U.S. taxation, provided the U.S. corporate parent owns at least 10 percent of the subsidiary.
- To transition to this new tax system, the framework treats accumulated offshore earnings as having been “repatriated” back to the United States. A one-time tax is imposed on the repatriation, although the exact rate remains unspecified.
- Additionally, to prevent U.S. companies from shifting profits overseas to low-tax jurisdictions, the plan calls for a tax, albeit “at a reduced rate,” on the foreign profits of U.S. multinational corporations.
State and Local Tax Deduction
- Although not explicitly mentioned, the plan may eliminate the deduction for state and local taxes.
- Some members of Congress have suggested that the deduction will be modified, rather than eliminated entirely.
- The plan simply repeals “the death tax and the generation-skipping transfer tax.”
- It remains to be seen what will happen to the gift tax.
While the political prospects for this overhaul are unclear (including when the plan would take effect), as this plan is fleshed out and details are made public, we will provide updates and insight on its prospects and the impact for individuals and companies across various sectors.