How will the coming tax reform impact you? What we know (and don’t know), so far.
In late September, President Trump and the GOP released their tax reform framework. The nine-page draft proposes significant benefits to businesses, with individuals receiving less than had previously been expected.
Impacts to Individual Taxpayers
Standard Deduction – The framework proposes nearly doubling the standard deduction and eliminating the personal exemption. As a result, more individuals would be able to use the simplified method of filing, rather than itemizing. Under the current system, the 2017 standard deduction plus exemptions for married taxpayers is $20,800. The framework would allow a standard deduction of $24,000.
Itemized Deductions – Itemized deductions would be allowed only for mortgage interest and charitable contributions.
Individual Tax Rates – The tax brackets would be compressed to three total rates at 12, 25 and 35 percent. The framework does not address the additional Net Investment Income tax of 3.8 percent, which is typically assessed to wealthy individuals.
Child Tax Credit – The framework seeks to raise the Child Tax Credit by phasing it out at higher income levels, increasing the number of families to which it applies and eliminating the marriage penalty. The credit will also be expanded to provide a partial credit for non-child dependents. Personal exemptions for dependents would be eliminated.
Other Individual Taxes –The alternative minimum tax, estate tax, and generation skipping taxes would be eliminated.
Impacts to Business
Flow–through Entities – Small family businesses would be subject to a maximum 25 percent tax rate. Appropriate limitations would be enacted to prevent wealthy individuals from recharacterizing personal income as business income to reduce their top tax rates.
Corporate Tax Rates – The top corporate rate would be 20 percent and the alternative minimum tax would be eliminated. Additional legislation may be enacted to reduce the double taxation of income.
Capital Investments – Full expensing of most capital investments would be enacted for at least five years.
Interest Expense – Corporations may be limited on the amount of deductible interest expense. Interest expense deductibility for non-corporate taxpayers has not been disclosed.
Business Credits – Each business credit will be considered for elimination. Specifically, the domestic production activities deduction has been targeted for elimination, while the R&D credit and Low Income Housing credit will be preserved.
Impacts to Globalization
Repatriation – Businesses with foreign income will be allowed a 100 percent exemption for repatriating foreign dividends of which they own 10 percent.
Outsourcing – Steps will be taken to reduce incentives for companies moving jobs and capital to safe haven jurisdictions. The goal is to level the playing field of U.S. and foreign-headquartered parent companies.
While this framework provides initial insight into the direction of tax reform, much work and negotiation remains to be done – including writing actual law in the subcommittees and getting it through a Congress that is deeply divided. How it addresses such issues as the deficit and revenue neutrality will be crucial in determining the final substance of the law.
Please contact an LWBJ tax professional if you would like further information.