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Tax Reform: Trump v1 Highlights

On September 27, 2017, the Trump Administration, the House Committee on Ways and Means, and Tax Reformthe Senate Committee on Finance released their initial attempt at tax reform. The document is entitled “Unified Framework for Fixing Our Broken Tax Code.” Some of the highlight items include:

  • Consolidating the current seven income tax brackets into three brackets of 12%, 25% and 35%;
  • Doubling the standard deduction for married taxpayers filing jointly to $24,000 and for single taxpayers to $12,000;
  • Increasing the Child Tax Credit (the first $1,000 will still be refundable), increasing the income levels at which the Child Tax Credit begins to phase out, and providing for a non-refundable credit of $500 for non-child dependants;
  • Eliminating most itemized deductions but for the home mortgage interest deduction and the deduction for charitable contributions;
  • Repealing the Alternative Minimum Tax (AMT);
  • Repealing the US Estate and Generation-Skipping Transfer Taxes;
  • Limiting the maximum tax rate to the business income of small and family-owned business who operate through passthrough entities (such as S corporations, partnerships and LLCs) to 25%;
  • Reducing the US corporate tax rate from 35% to 20% and eliminating the corporate AMT;
  • Allowing for full and immediate expensing of the cost of new investments in depreciable assets;
  • Partially limiting the deduction for net interest expense incurred by C corporations;
  • Moving away from the current system of “worldwide taxation” on C corporations to a more territorial system by allowing a 100% exemption for dividends from foreign subsidiaries (in which the US parent owns at least a 10% shareholding);
  • Subjecting accumulated foreign earnings to a one-time tax on deemed repatriation, payment of which will be spread out over several years; and
  • Taxing, at a reduced rate and on a global basis, the foreign profits of US multinational corporations.

Some of the items, especially those reducing the corporate tax rate and moving toward a territorial system of taxation, might actually result in tax reform. However, the vast majority of the proposals seem to be more of tax cuts rather than a true tax reform.

In addition, some of the proposals are bound to be controversial and may have difficulty getting through Congress. For example, the elimination of AMT and the US Estate Tax (and Generation Skipping Tax), which currently affects a small number of taxpayers, might be seen as a significant tax cut for the truly wealthy (for additional detail on the elimination of the US Estate Tax and why this is especially controversial, please see Andrew Aldridge’s post). The reduction of the maximum rate of tax for businesses operating through passthrough entities would be disadvantageous to traditional employees and could be subject to abuse by wealthy taxpayers.

Finally, although the proposal doubles the standard deduction available to individual taxpayers, it does so at the expense of the personal exemption amount and the elimination of certain itemized deductions such as the state and local tax deduction. Therefore, it is possible that certain lower and middle income taxpayers will see a tax rise rather than a tax cut.

Clearly, the document released is at a high level and therefore, the devil will be in the details as to how all of the above items might be achieved (as well as paid for). Draft legislation will hopefully be available by the end of the year, so stay tuned . . .

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