On September 27, 2017, the White House, the House Committee on Ways and Means, and the Senate Committee on Finance released a summary of its proposed tax reform package, the Unified Framework for Fixing Our Broken Tax Code (a copy of which can be found here at this link: https://www.treasury.gov/press-center/press-releases/Documents/Tax-Framework.pdf). Although this proposal was jointly released by the White House, the House Committee on Ways and Means, and the Senate Committee on Finance, currently no bill has been introduced that will implement these reforms.
The summary proposes to (i) lower individual and business income tax rates and (ii) repeal the estate and generation-skipping transfer taxes (with no mention of gift taxes or basis step-up at death). Though the proposal is short on detail, it does promise the following reforms at the individual level:
- Reduce the number of tax brackets from seven to three, with rates of 12, 25, and 35 percent, without specifying where the brackets start and end;
- Almost double the standard deduction from its current amount to $12,000 for single filers and $24,000 for married taxpayers filing jointly; Repeal personal exemptions for dependents;
- Increase the child tax credit to an unspecified amount and increase the income levels at which the child tax credit begins to phase out, and expand the child tax credit by giving a $500 credit to any individual caring for a family member who isn’t a child, regardless of age;
- Repeal the individual alternative minimum tax;
- Eliminate most itemized deductions (including the deduction for state and local taxes), but retain deductions for home mortgage interest and charitable contributions; and
- Repeal the estate and generation-skipping transfer taxes (without mention of the gift tax)
At the corporate level, the proposal promises the following reforms:
- Lower the corporate tax rate from 35 percent to 20 percent;
- Eliminate the corporate alternative minimum tax;
- Provide a maximum tax rate of 25% for pass-through entities (i.e. partnerships, LLCs and subchapter S corporations) rather than taxing such income at the owner’s individual tax rates that currently apply;
- Allow immediate expensing of the cost of new investments in depreciable assets “other than structures made after September 27, 2017” for at least five years;
- Limit the deduction for net interest expense incurred by C corporations;
- Eliminate the deduction under Internal Revenue Code § 199 for domestic production;
- Modernize rules that give special tax treatment to certain unspecified industries and sectors;
- Exempt the repatriation of foreign profits and replacing the current worldwide tax system with a complete exemption for dividends from foreign subsidiaries; and
- Tax foreign profits of U.S. multinational corporations at a reduced rate and on a global basis.
The proposal promises that the reform will strengthen and grow the middle class by reducing its tax burden, as well as modernize the U.S. business tax system, spur the economy, and make the United States more competitive in the international playing field. However, the proposal is already being criticized as being a tax cut for the wealthy, with no real savings for lower and middle class taxpayers.
Although merely a proposal, if implemented, the Unified Framework for Fixing Our Broken Tax Code will be the largest tax reform seen in three decades, and will provide new income tax and estate tax planning opportunities for individuals and businesses alike. We will continue to monitor these developments and provide you with the latest information as it becomes available.