The Republican promise of tax reform in 2017 took a huge step forward yesterday when Republican lawmakers released a framework for tax reform, announcing that their goals are to cut tax rates, simplify the Internal Revenue Code, and provide a more competitive environment for business. The framework generally reiterates proposals made by President Donald Trump in April.
The proposal promises lower tax rates for both individuals and business entities and seeks to simplify a number of aspects of the federal tax code.
The framework contains only the broad outlines of a potential tax bill. A number of details will be determined by the tax-writing committees in Congress. Republicans have announced that their goal is to have tax reform legislation enacted by the end of the year. Below is a summary of the framework, as noted by Bloomberg BNA. We will be closely following the progress of tax reform through Congress and will keep you updated as more details emerge.
|Corporate Tax Rates||20% corporate tax rate.||Graduated rate schedule with maximum rate of 35%.|
|AMT (Corporate)||Corporate AMT to be eliminated.||20% of income above $40,000 (small corporations exempt).|
|Tax Rate on Pass- Through Entities||25% maximum tax rate on sole proprietorships, partnerships, and S corporations. Measures will be adopted to prevent recharacterization of personal income into business income to prevent wealthy individuals from avoiding the top personal tax rate.||Income earned through partnerships and S corporations passed through to partner/shareholder and taxed at ordinary income rates.|
|Depreciation/ Expensing||The proposal would allow business to immediately expense the cost of new investments in depreciable assets other than structures made after September 27, 2017, for at least 5 years.||The cost of capital investments generally is deducted from income over multiple years through a depreciation deduction. Taxpayers, other than trusts or estates, may elect to treat up $510,000 (in 2017) of the aggregate cost of qualified property placed in service during the tax year as a current expense rather than as a capital expenditure.|
|Domestic Production Deduction||The proposal would repeal the domestic production (“section 199”) deduction.||Nine percent deduction for qualified production activities income under IRC §199.|
|Research and Development Credit||The proposal would explicitly preserve the Research and Development Credit while repealing most other business credits.||A credit is available equal to 20% of qualified research expenses.|
|Interest Expense Deduction||The proposal would partially limit the deduction for net interest expense incurred by C corporations.||C corporations may deduct interest paid or accrued within a tax year on indebtedness.|
|Taxation of Foreign Income||Territorial system with 100% exemption for dividends from foreign subsidiaries in which the U.S. parent owns at least 10%.||Worldwide tax system.|
|Repatriation||Deemed repatriation of accumulated foreign earnings. At least two different tax rates are contemplated for earnings held in illiquid assets (lower rate) and in cash or cash equivalents (higher rate). Payment of tax liability would be spread out over several years. The rates and the period of time for payment are not specified.||No provision.|
|Individual Income Tax Rates||Under the proposal, the existing 7 tax brackets would be consolidated into three brackets: 12%, 25%, 35%
The proposal allows for the possibility of an additional top rate that would apply to the highest-income taxpayers.
|10%, 15%, 25%, 28%, 33%, 35%, 39.6%.|
|Standard Deduction||The proposal would increase the standard deduction to:
$24,000 for married taxpayers filing jointly, and
$12,000 for single filers. The proposal would also consolidate the additional standard deduction into this larger standard deduction.
Single individuals and married filing separately: $6,350
Head of household: $9,350
Married filing jointly: $12,700
Additional standard deduction of $1,250 for aged or blind.
|Personal Exemptions||The proposal would consolidate the personal exemptions for the taxpayer and the spouse into the new larger standard deduction.
The proposal would also repeal personal exemptions for dependents (in favor of the increased Child Tax Credit).
|$4,050 (for 2017) per individual (taxpayer and dependents)|
|Itemized Deductions||The proposal would eliminate most itemized deductions, but retain tax incentives for home mortgage interest and charitable contributions.||Mortgage interest payments up to $1 million in acquisition debt and up to $100,000 in home equity debt deductible. Charitable contributions allowed subject to specified income percentage limitations. Taxpayers can deduct state and local income tax as an itemized deduction.|
|AMT (Individual)||The proposal would repeal the existing individual AMT.||The sum of—
26% of so much of the taxable excess as does not exceed $187,800 (for 2017), plus
28% of so much of the taxable excess as exceeds $187,800 (for 2017).
|Child-Related Expenses||The proposal would significantly increase the Child Tax Credit. The first $1,000 of the credit would be refundable.
The proposal would also increase the income levels at which the Child Tax Credit begins to phase out.
|$1,000 credit for each qualifying child under the age of 17. Phase-out begins for taxpayers with modified adjusted gross income (MAGI) over $75,000 for single filers, $110,000 for joint filers, and $55,000 for married taxpayers filing separately. A portion of the credit may be refundable.|
|Adult-Care Expenses||The proposal would provide for a non-refundable credit of $500 for non-child dependents. Under the proposal, the deduction for medical expenses would presumably be eliminated (see “Itemized Deductions,” above).||A dependency exemption is allowed for a qualifying relative. Medical expenses paid for an adult dependent qualify for deduction.|
|Estate Tax||The proposal would repeal the federal estate tax.||For 2017, rate is 40% with unified credit exclusion amount of $5,490,000.|
|Generation-Skipping Transfer Tax||The proposal would repeal the federal generation-skipping transfer tax.||For 2017, rate is 40% with GST exemption amount of $5,490,000.|
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