On September 27, 2017, the White House and Republican leaders unveiled their tax reform framework. The nine page document titled “Unified Framework for Fixing Our Broken Tax Code” outlines the President’s goals to deliver lower business and individual tax rates while simplifying the tax code.
The framework does not go into detail on how the tax cuts will be paid for, and the previous proposal of a border adjustment tax is noticeably missing. As expected, Democrats are lining up against the framework, while Republicans hope to avoid a Democratic filibuster of the eventual bill in the Senate by using a budget reconciliation procedure that would only require 51 votes for passage.
The President is calling this “a once-in-a generation opportunity to give American workers and businesses the level playing field they deserve and make us competitive once again on the world stage.”
The highlights of the framework are as follows:
For businesses, the framework:
- Limits the maximum tax rate applied to pass-through entities (i.e. S-Corporations and Partnerships) income to 25 percent. It also calls for the adoption of anti-abuse measures to prevent taxpayers from characterizing personal income as business income.
- Lowers the corporate tax rate to 20 percent and aims to eliminate the corporate AMT.
- Allows the immediate expensing of the cost of new investments in depreciable assets (other than buildings) made after September 27, 2017 for at least five years.
- Partially limits the deduction for net interest expense incurred by C-Corporations.
- Retains the research and development (R&D) and low-income housing credits, but would repeal the Section 199, Domestic Production Activities Deduction (DPAD).
- Allows for an exemption of foreign profits when they are repatriated to the United States by replacing the current worldwide system with a 100 percent exemption for dividends from foreign subsidiaries (in which the U.S. parent owns at least 10 percent).
- Allows for a one-time, low tax rate on wealth that has already accumulated overseas so there is no tax incentive to keep the money offshore.
For individuals, the framework:
- Shrinks the current seven tax brackets into three – 12 percent, 25 percent, and 35 percent – with the potential for an additional top rate for the highest-income taxpayers.
- Roughly doubles the standard deduction to $24,000 for married taxpayers filing jointly and $12,000 for single filers.
- To simplify the tax rules, the additional standard deduction and personal exemptions for the taxpayer and spouse are consolidated into this larger standard deduction. In combination, these changes effectively create a larger “zero tax bracket” by eliminating taxes on the first $24,000 of income earned by a married couple and $12,000 earned by a single individual.
- Increases the income levels at which the Child Tax Credit begins to phase out. The modified income limits will make the credit available to more middle-income families and eliminate the marriage penalty in the existing credit. The framework also provides a non-refundable credit of $500 for non-child dependents to help defray the cost of caring for other dependents.
- Repeals the Alternative Minimum tax.
- Eliminates most itemized deductions such as state and local income tax deductions, but retains tax incentives for home mortgage interest and charitable contributions.
- Repeals the “death tax” and the generation-skipping transfer tax.
- Calls for the elimination of various other exemptions, deductions, and credits to help simplify the tax code.
If enacted, this would be the first major tax reform legislation since 1986. However, many of the details in the framework will need to be ironed out and it will face significant political challenges as it makes its way through the House and Senate committees.
As year-end tax planning approaches, taxpayers should take careful consideration of the timing of income and deductions in light of this potential legislation. We will continue to keep you informed on the progress of the drafting of this legislation.
If you have any questions or would like to discuss this subject further please do not hesitate to contact a member of Kreischer Miller’s Tax Strategies group at 215.441.4600.
Information contained in this alert should not be construed as the rendering of specific accounting, tax, or other advice. Material may become outdated and anyone using this should research and update to ensure accuracy. In no event will the publisher be liable for any damages, direct, indirect, or consequential, claimed to result from use of the material contained in this alert. Readers are encouraged to consult with their advisors before making any decisions.