Today, the Trump Administration together with the House Ways and Means Committee and the Senate Finance Committee released the framework of their much-anticipated tax reform plan. The key components of the plan include tax rate reductions: the corporate rate would fall to 20%, the top individual rate would drop to 35% and the rate for income from pass-through entities would be 25%. Republicans plan to use a procedural move to avoid the threat of a Democratic filibuster in the Senate. Many of the details have yet to be worked out, but here are some of the more relevant parts of the tax reform plan:
- Tax rate reduction: Three tax brackets would apply for individuals – 12%, 25% and 35%. As one of the goals of tax reform was not to shift the tax burden from the top income earners to the middle and bottom earners, the framework would give legislators the “flexibility” of adding a fourth rate above 35%.
- Standard deduction for individuals would rise to $12,000 for single taxpayers and $24,000 for married couples. Personal exemptions would be eliminated.
- Most itemized deductions, including the state and local income tax deduction, would be eliminated, but those for charitable contributions and home mortgage interest would be preserved.
- Child tax credit would be “significantly” higher than the current credit worth $1,000 per child under 17 (with the first $1,000 being a refundable credit as under current law), and the income thresholds for eligibility would be raised. The amount of credit and income thresholds would be up to lawmakers to decide.
- Tax credit for non-child dependents – a non-refundable tax credit of $500 for non-child dependents would be provided to help defray the costs of caring for other dependents.
- Alternative Minimum Tax (AMT) would be repealed.
- Estate tax and generation-skipping transfer tax would be repealed.
- Corporate tax rate would drop from today’s top rate of 35% to 20%.
- Income from pass-through entities, including sole proprietorships, partnerships and S-corporations, would drop to 25%. To prevent the re-characterization of wages as pass-through income, legislators will include provisions to prevent abuse.
- Move to territorial tax system for international companies: Multinationals would no longer pay U.S. tax on income earned overseas. Instead, the framework calls for a territorial system where overseas profits of U.S. companies would be subject only to the tax of the foreign jurisdiction. Dividends from foreign subsidiaries (where the U.S. parent owns at least 10%) would be exempt from tax.
- To dissuade U.S. companies from shifting their profits to low-tax or no-tax jurisdictions, the framework would impose a minimum tax on a global basis on the foreign profits of U.S. multinationals. The rate of such tax is yet unspecified.
- Bring profits back home: The framework provides for a low, one-time tax rate on accumulated foreign earnings as an incentive for U.S. companies to bring that money back. The rate is yet to be determined but would feature a lower rate for illiquid assets.
- Write-off of depreciable assets: For at least five years, businesses would be able to expense 100% of depreciable assets other than buildings effective for assets placed in service after September 27, 2017.
- Manufacturer’s deduction repealed: The Section 199 Domestic Production Activities Deduction would be repealed.
- Interest expense for corporations limited: The net interest expense for “C” corporations would be partially limited. The tax writing committees will consider the “appropriate treatment” for interest paid by non-corporate taxpayers.
- R&D credits and low-income housing credits would be preserved.
- C corporations – Aims to eliminate AMT and considers reducing double taxation.
Previous Tax Proposals Not Addressed in Framework
The tax reform framework did not address several previous proposals as well as some specifics of items that were included in the framework, so there is some uncertainty as to the future of these items:
- 8% Net Investment Income Tax
- Affordable Care Act taxes
- Capital gains and dividends tax rates
- Carryforward of net operating losses
- LIFO inventory method for tax purposes
- Medical expenses as an itemized deduction
- Carried interest legislation
- Border Adjustments Tax
If you have questions about how the proposed tax reform plan might impact you, please contact your Elliott Davis tax advisor.