On Wednesday, September 27, 2017, the Trump Administration, House Committee on Ways and Means, and the Senate Committee on Finance released a document titled, “Unified Framework for Fixing our Broken Tax Code”1 with the hope that it will provide a framework for the upcoming debate on tax reform.
The proposal is missing many key details, but it does provide a general overview of the changes that we may ultimately see. For this quarter’s Tax Update, we thought you might want to see a summary of what is included in the document:
Individual Tax Provisions:
- The number of tax brackets would be reduced from seven into three brackets of 12%, 25% and 35%. The document further states that a fourth bracket may be applied to the highest-income taxpayers to ensure that taxes are not shifted from high income to lower and middle income taxpayers.
- Most itemized deductions are eliminated (i.e. state income tax, real estate tax, medical expenses, investment expenses, etc.) but tax incentives for charitable contributions and mortgage interest will be retained.
- The standard deduction would be almost doubled to $24,000 for married taxpayers filing jointly and $12,000 for single filers.
- The deduction based on the number of personal exemptions would be eliminated but an enhanced child tax credit would be enacted.
- The Individual Alternative Minimum Tax (AMT) would be repealed.
- Tax incentives for retirement plan savings and education funding will be retained.
- The Estate Tax and Generation Skipping Tax would be repealed.
Business Tax Provisions:
- The maximum tax rate to be applied to business income generated through sole proprietorships, partnerships, and S corporations would be limited to 25%.
- The maximum tax rate to be applied to business income of C corporations would be 20%.
- Businesses would be allowed to immediately write-off the full cost of new investments in depreciable assets other than structures for a period of at least five years.
- The deduction for interest expense of C corporations would be partially limited.
- The incentive to keep foreign profits offshore to avoid corporate tax would be eliminated.
The framework documents leave many details incomplete or blank. They state that the details will be determined within the various committees that will mark-up the bill during the legislative process. Some examples of unanswered questions include:
- Will the existing preferential tax rate on qualified dividends and long-term capital gains be retained?
- Will a step-up in the basis of assets be allowed at the death of a taxpayer or will the heirs be subject to income tax on the unrealized appreciation?
We will continue to closely monitor any updates on tax reform as it moves through the process, and we will take our latest knowledge into account as we work through year-end planning strategies for CCM clients. Please contact us if you have any questions about how tax reform may impact your personal situation.