The Long-Awaited Tax Proposal: The Unified Framework for Fixing our Broken Tax Code
On September 27, 2017, the Trump Administration and Republican leaders released a unified framework for tax reform that would make changes to both individual and business taxation, including suggested cuts in rates.
The unified framework is a nine-page blueprint of proposals for tax relief that is not very specific or detailed, nor does it indicate how to pay for the proposed cuts. The President noted that he will leave it up to Congressional committees to supply details.
The unified framework includes the following individual, trust, and estate proposals:
- Reduce the number of tax brackets from seven to three, with rates of 12, 25, and 35 percent, with a potential fourth bracket at a higher rate to avoid creating a tax cut for high income earners. The framework does not specify where the brackets start and end, but notes that they may be subject to inflation adjustments.
- Increase the standard deduction to $24,000 for married taxpayers filing jointly, $18,000 for head of household filers and $12,000 for single filers. (This is referred to as a “Zero Tax Bracket.”)
- Repeal personal exemptions for dependents and increase the Child Tax Credit (to an unspecified amount), and increase the income levels at which the Child Tax Credit begins to phase out. The first $1,000 of credit will continue to be refundable as under current law. The modified income limits will make the credit available to more families.
- Expand the Child Tax Credit to provide a $500 credit to individuals caring for a non-child family member, regardless of age.
- Repeal the individual alternative minimum tax.
- Eliminate most itemized deductions (including deductions for state and local income taxes), but retain tax incentives for home mortgage interest and charitable contributions.
- Repeal the estate and generation-skipping transfer taxes (without mention of the gift tax or step up in basis on post-death transfers.)
- Eliminate the deduction for state and local taxes.
Further, the Administration noted that the Earned Income Tax Credit will be retained, but will be simplified to improve its efficiency.
The elimination of personal exemptions is an attempt to simplify tax rules by consolidating benefits into a larger standard deduction. The repeal of most itemized deductions may hurt taxpayers in states with high real estate and state income taxes.
The unified framework includes the following business and international proposals:
- Lower the top corporate tax rate from 35 percent to 20 percent.
- Eliminate the corporate alternative minimum tax.
- Apply a maximum tax rate for income related to pass-through businesses—such as sole proprietorships, partnerships, LLCs taxed as partnerships, and Subchapter S corporations—of 25 percent, instead of the individual tax rates that currently apply, and adopt measures to prevent re-characterization of personal income as business income in an effort to avoid the top personal tax rates.
- 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 (DPAD) and state and local tax deductions.
- Remove special tax treatment of certain unspecified industries and sectors.
- Provide for 100% dividend-received deduction for foreign subsidiaries owned at least 10% by a U.S. parent.
- Current unpatriated earnings (foreign profits of U.S. multinational corporations) would be subject to a one-time reduced rate as the earnings are issued back into the United States.
Based on the above summary, many current business benefits would face repeal, but the framework specifically retains the R&D Credit and the Low Income Housing Tax Credit. Other business credits may also be allowed.
The framework may put the U.S. corporation tax rate below the average of other industrialized countries.
While the framework allows for businesses to immediately expense the cost of most new depreciable assets, it is unprecedented in its level of expensing and duration. The price of the full expensing is the loss of the interest expense deduction for C corporations.
At this time, the framework is a proposal, with lawmakers attempting to simplify the tax code and provide relief to the American middle class. As noted, the framework intentionally lacks technical details and is sure to be challenged by political opposition and economists and those residing in high-tax states.
The tax professionals at Marcum urge you to contact us to discuss how these provisions may affect your personal or business tax situation.