Initial reveal of proposed tax reform provides some insight, short on detail

September 28, 2017

By Randy Mihm, CPA, JD, Partner

:: UPDATE Oct. 20, 2017 ::

The prospects for tax reform took a major step forward on Oct. 19, 2017, as the U.S. Senate narrowly approved a budget resolution that includes a plan for tax reform.  This resolution invokes the budget process, which may require only a simple majority for passage, rather than a 60 vote majority. The resolution passed by a vote of 51-49 on party lines with Sen. Rand Paul (R-Ky) voting no.  If the tax reform is to be successful, there is little room for desertion from this narrow majority.

Despite this vote, no additional details are yet available regarding the GOP’s plan other than the blueprint featured below. We expect the next several weeks will be filled with negotiation and drafting of the detailed plan. We will continue to monitor developments in this important legislation which may affect your tax situation.

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There is a lot of mixed buzz surrounding the most recent release on Sept. 27, 2017, of the President Trump’s and Republican members of Congress’ proposed tax reform plan. While this is only an initial outline, there are a few key take-aways to watch for as this moves through Congress:

  • There are not a lot of detail on the proposals, those details will need to be filled in over the next days and months.
  • There is currently no mention of effective dates or of retroactive effects (with the exception of a Sept. 27, 2017 date for expensing of assets as described below).
  • Corporate tax rates would drop to a top rate of 20% from a top rate of 35%.
  • The standard deduction for married individuals filing a joint return would double from $12,000 to $24,000.
  • The framework indicates most itemized deductions are to be eliminated, but not those for mortgage interest and charitable deductions. The result of this is not clear, but the analyst consensus has been that the deduction for state and local taxes will be eliminated. The fate of deductions for medical and miscellaneous itemized deductions is not clear
  • The individual rates would be consolidated from seven to three rates: 12%, 25%, and 35%. However, the framework also calls for an unspecified “additional top rate, [which] may apply to the highest-income taxpayers to ensure that the reformed tax code is at least as progressive as the existing tax code and does not shift the tax burden from high-income to lower- and middle-income taxpayers.”
  • Pass-through entity tax is limited to 25% as follows: “The framework limits the maximum tax rate applied to the business income of small and family-owned businesses conducted as sole proprietorships, partnerships and S corporations to 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.”
  • An item of particular note is the immediate expensing of business assets, as follows: “The framework allows businesses to immediately write off (or “expense”) the cost of new investments in depreciable assets other than structures made after Sept. 27, 2017, for at least five years. This policy represents an unprecedented level of expensing with respect to the duration and scope of eligible assets. The committees may continue to work to enhance unprecedented expensing for business investments, especially to provide relief for small businesses.”
  • The research and development (R&D) credit and low-income housing credits are to be maintained.
  • The items specifically listed for elimination are:
    • The federal estate tax and generation skipping tax
    • The alternative minimum tax
    • The domestic production deduction under Sec. 199 (DPAD)
  • There is no mention of:
    • The capital gains rate
    • The rate of tax on dividend income

Stay tuned for more information as the details of this proposed reform come to light over the next several weeks. Consult with your tax professional if you have any questions on how the proposed may affect you.

For more information, call 888-556-0123.

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