In a pivotal move on September 27, 2017, President Trump laid out a comprehensive tax plan in collaboration with key Republican leaders in Congress, aptly titled the "United Framework for Fixing Our Broken Tax Code." While its potential impact on most taxpayers is significant, uncertainties surround its passage, and inevitable modifications are expected. This article provides a nuanced overview of the primary elements of this tax proposal, dissecting its implications for individuals, businesses, and estate planning.
Individual Provisions: Reshaping Tax Brackets and Credits
The proposed individual provisions aim to streamline the tax code, creating a more straightforward structure with a focus on providing relief for middle-income families. Key elements include:
Elimination of Personal Exemption for Dependents:
The plan proposes doing away with the personal exemption for dependents, marking a departure from the existing framework.
Doubling of Standard Deduction:
The standard deduction sees a substantial increase, nearly doubling to $24,000 for joint filers and $12,000 for single filers. This incorporates the additional standard deduction and personal exemptions for spouses, establishing a zero tax bracket for the initial income thresholds.
Consolidation of Tax Brackets:
Streamlining the tax brackets from seven to three, set at 12%, 25%, and 35%, with a potential additional top rate for high-income earners. The goal is to maintain a progressive tax structure without shifting the burden to lower and middle-income taxpayers.
Enhancements to Child Tax Credit:
A significant increase in the child tax credit is proposed, making the first $1,000 refundable. The income limits for phasing out the credit would be raised, with the removal of the marriage penalty.
Introduction of Non-Child Dependent Credit:
A non-refundable $500 credit is suggested to aid in covering the costs of caring for non-child dependents.
Repeal of Alternative Minimum Tax (AMT):
The proposal includes the repeal of the AMT, providing relief to taxpayers previously subject to its complexities.
Modification of Itemized Deductions:
Most itemized deductions, except for charitable contributions and home mortgage interest, are set to be repealed. This provision, however, faces resistance from some Republican Congress members in high-tax states.
Taxpayers in the existing 10% bracket are anticipated to benefit from the new plan, primarily due to the expanded standard deduction, increased child tax credit, and additional tax relief expected during the committee process.
A Potential Shift in Dynamics
The proposed plan envisions the repeal of the Estate and Generation-Skipping Transfer Tax, although it's crucial to note that certain states may still impose an Estate tax even if this federal provision is eliminated.
Catalyzing Growth and Investment
The business-related provisions aim to foster economic growth and investment, offering relief to small family-owned businesses and corporations. Key components include:
Taxation of Business Income:
Small family-owned businesses conducted as sole-proprietorships, partnerships, and S corporations could see their business income taxed at a maximum rate of 25%. The plan outlines measures to prevent the recharacterization of personal income into business income to curb potential abuse by wealthy taxpayers.
Observation: The potential impact on strategies like minimizing FICA tax through taking a minimum salary from an S corporation is an area of interest and scrutiny.
Reduction in C Corporation Tax Rate:
The C corporation tax rate is proposed to be reduced to 20%.
Elimination of Corporate AMT:
The Corporate AMT is slated for elimination, simplifying the tax structure for corporations.
Immediate Deduction for Depreciable Assets:
Businesses would be allowed to immediately deduct the cost of investments in depreciable assets (excluding structures) incurred after September 27, 2017, for a period of five years.
Limitation on Deduction for C Corporation Net Interest Expense:
The deduction for C corporation net interest expense would be limited.
Elimination of Domestic Production Deduction (Section 199):
The Domestic Production Deduction would be eliminated, streamlining business-related deductions.
Overhaul of Worldwide Tax System:
The proposal advocates replacing the Worldwide Tax system with a Territorial Tax system. Dividends from foreign subsidiaries, if the U.S. parent owns at least 10%, would be 100% exempt from tax. Transition rules would treat accumulated foreign earnings as repatriated, with lower rates for non-liquid foreign earnings.
Sweeping Changes to Business Credits:
The plan suggests eliminating most business credits, retaining only the Research and Development Credit and Low-Income Housing Credit.
The proposal includes protective rules to prevent profit-shifting overseas, aiming to maintain a level playing field between U.S.-headquartered and foreign-headquartered parent companies.
Considerations for Tax Planning and Beyond
While these provisions remain proposals, they warrant consideration in various client conversations, including estate planning, year-end tax planning, and entity formation. It's important to note that existing taxes, such as the 3.8% Net Investment Income tax and 0.9% Additional Medicare Tax, remain relevant considerations.
About the Author: John M. Stevko, CPA
Bringing over 40 years of professional experience to the table, John M. Stevko is a seasoned tax practitioner, national seminar instructor, writer, and business owner. His journey from a "Big 4" public accounting firm to founding a local CPA firm in Beaverton, Oregon, and eventually becoming the managing partner of Gear Up Tax seminars, attests to his diverse expertise. Renowned for lecturing on tax law and healthcare reform nationally, John has left an indelible mark on the industry and has been sought after for his insights on television and radio programs.