On September 27, 2017, The Trump Administration and select members of Congress released a “unified framework” for tax reform. The framework is the result of several months of discussion among the so-called “Big Six”—House Speaker Paul Ryan (R-WI), Senate Majority Leader Mitch McConnell (R-KY), Treasury Secretary Steven Mnuchin, White House adviser Gary Cohn, House Ways & Means Committee Chairman Kevin Brady (R-TX), and Senate Finance Committee Chairman Orrin Hatch (R-UT).
The framework contains many familiar items and themes, including some from the House Republicans’ “A Better Way” blueprint issued last summer, and some from various proposals made by the President.
Please note that this is only a proposal, and it is virtually certain that there will be many changes during the upcoming months of debate in the House and Senate.
Individual tax reform provisions include:
- Reduced number of tax brackets.The framework would reduce the number of tax brackets from seven to three: 12%, 25%, and 35%. Under current law, the lowest tax bracket is 10%, and the highest is 39.6%.
- Increased standard deduction; elimination of personal exemptions and additional standard deductions for older/blind taxpayers.The framework would increase the standard deduction to $24,000 for married taxpayers filing jointly, and $12,000 for single filers.
- AMT repealed; The framework calls for repealing the individual alternative minimum tax (AMT).
- Itemized deductions largely eliminated; home mortgage interest & charitable contributions retained.The framework would eliminate “most” itemized deductions, but would retain tax incentives for home mortgage interest and charitable contributions.
- Among the deductions that would be eliminated under the framework is the state and local tax deduction.
- Child tax credit “enhanced,” and non-child credit provided. The framework states that it “significantly increases” the child tax credit, but does not specify the increased amount.
- Additionally, the income levels at which the credit phases out (currently, $110,000 for joint filers, $75,000 for unmarried individuals, and $55,000 for married taxpayers filing separately) would be increased, to unspecified amounts.
- Estate and generation-skipping transfer taxes repealed.
- Catch-all.Numerous other exemptions, deductions and credits for individuals will likely be repealed in order to make the system “simpler and fairer.”
Business tax reform provisions include:
- New corporate tax rate.The framework would reduce the corporate tax rate to 20% (down from the current top rate of 35%). It also “aims” to eliminate the corporate AMT.
- Further, the committees “also may consider methods to reduce the double taxation of corporate earnings
- New top rate for “small” pass-throughs.Under the framework, the maximum tax rate applied to the business income of “small” and family-owned businesses conducted as sole proprietorships, partnerships and S corporations would be 25%.
- The framework “contemplates that the committees will adopt measures to prevent the recharacterization of personal income into business income to prevent wealthy individuals from avoiding the top personal tax rate.
- Full expensing for five years.The framework would allow businesses to immediately write off (i.e., expense) the cost of new investments in depreciable assets other than structures that are made after Sept. 27, 2017, for at least five years.
- Interest expense deductions.The deduction for net interest expense incurred by C corporations would be “partially limited” under the framework (without further details as to what this means). The tax-writing committees are instructed to consider how interest should be treated by non-corporate taxpayers.
- Most deductions and credits repealed; but research and low-income housing credits retained.The framework states that, because of the rate reduction for businesses, the domestic production activities deduction (DPAD) would no longer be necessary. It also provides that “numerous other special exclusions and deductions” would be repealed or restricted.
- However, the framework retains the research credit and the low-income housing tax credit (LIHTC).
- Foreign dividend exemption; repatriation. The framework would provide for a 100% exemption for dividends from foreign subsidiaries, defined as companies in which the U.S. parent owns “at least a 10% stake.”
- To transition, the framework would treat accumulated offshore profits as repatriated, giving rise to a one-time repatriation tax (at an unspecified “low” rate) that could be paid over five years.
- Accumulated foreign earnings “held in illiquid assets” would be subject to a lower tax rate than foreign earnings held in “cash or cash equivalents.”
You can link to the Framework here: https://waysandmeansforms.house.gov/uploadedfiles/tax_framework.pdf
Throughout the upcoming weeks and months we will all hear more about these and other potential tax law changes as Congress works to pass tax reform legislation this year.
We will continue to update you as significant changes to this, or other, proposals occur, and look forward to speaking with you later in October and November to discuss, and plan for, how these changes may affect you.
Thank you,
Scott C. Schoenstadt, CPA, CGMA
Director of Tax Services
