GOP Leaders Release Tax Reform Framework
On Wednesday, September 27, 2017, President Trump and Republican leaders in Congress released a framework for tax reform. The framework states that it will provide a “tax code that is built for growth, supports middle-class families, defends our workers, protects our jobs, and puts America first.” The framework further explains that this will be accomplished through tax relief for middle-class families, simplified tax filing for most Americans, tax relief for businesses (especially small businesses), ending incentives to hold jobs, capital and tax revenue overseas, and broadening the tax base and closing special interest tax breaks.
Three Tax Brackets-Highest Rate: 35% - There are currently seven tax brackets for individuals. The GOP plan would consolidate these seven tax rates into three: 12%, 25% and 35%. The framework does not provide the applicable income levels for these three proposed rates. An additional top rate may apply to the highest-income taxpayers. There is no mention of a special rate for capital gains and qualified dividends, as under current law.
Standard Deduction/Personal Exemption and Child Care Credit - The framework provides for an increased standard deduction for individuals to $24,000 for married taxpayers filing jointly and $12,000 for single filers. Additionally, the child tax credit would be increased, and a new non-refundable credit for non-child dependents would be created. However, the personal exemption for dependents would be repealed, and most itemized deductions would be eliminated.
Limited Itemized Deduction and Other - The plan retains tax incentives for home mortgage interest and charitable contributions. Interestingly, the framework does not mention the deduction for state and local taxes. Finally, the GOP plan would also eliminate both the estate tax and the Alternative Minimum Tax for individuals.
Highest Rate: 20%; 25% for Pass-through - Under the GOP framework, the corporate tax rate would be reduced from the maximum rate of 35% to 20%. Pass-through income from business such as S corporations, partnerships and sole proprietorships would be taxed at the individual level at a rate of 25%.
Increased Expensing, R&D Retained, but other incentives eliminated - Several changes would also be made to the deductions and credits that are currently available. For instance, the plan provides for the expensing of certain capital investments, and retains the research tax credit and incentives for low income housing. However, the section 199 deduction would be eliminated and deductions for interest expense would be limited. The Alternative Minimum Tax for corporations would also be repealed.
Territorial Tax System - Finally, the GOP plan includes a move from the current worldwide income base for taxation to a territorial tax system, where U.S. tax would no longer be imposed on overseas profits of U.S. companies. As part of the transition to this new system, the framework treats foreign earnings that were accumulated under the worldwide taxation system as repatriated. These repatriated “old” earnings will be taxed at different rates depending upon whether they were held in cash or other business assets. The payment for these earnings will be spread over several years.
The GOP Tax Reform Framework is intended to provide a broad description of tax proposals. Now, it will be up to the congressional tax-writing committees (the House Ways and Means Committee and the Senate Finance Committee) to provide the tax reform legislative language.
Moore Stephens Doeren Mayhew is closely monitoring the U.S. tax reform process. We can assist in determining what impact these proposed tax law changes may have on you and your business, and how you might want to react. Although you may not want to take action yet because the issue of paying for these rate reductions has not been addressed, you can start reviewing how your specific legal structure might be impacted.