Will tax reform happen in 2017 or 2018? I don’t believe anyone knows for sure. According to the Trump administration, a new framework will deliver a 21st century tax code that’s built for growth, supports middle-class families, defends workers, protects American jobs and puts America first. It proposes to deliver fiscally responsible tax reform by broadening the tax base, closing loopholes and growing the economy. It includes the following:
• Tax relief for middle class families.
• Postcard tax filing for the vast majority of Americans.
• Tax relief for business, especially small business.
• Ending incentives to move jobs, capital, and revenue overseas.
• Broadening the tax base and providing greater fairness for all Americans by closing special interest tax breaks and loopholes.
Wow, almost sounds too good to be true!
The unified framework
On September 27, 2017, Republicans in Congress and the Trump administration released their “Unified Framework” for tax reform to accomplish the above goals. The document is meant to be the foundation Congress will use to put forth legislation for middle income tax cuts, a simpler and fairer tax code, competitive tax rates aimed at helping US companies create more jobs, give workers a pay raise and grow the economy as enumerated above.
Rates and individual changes
Under the current tax code, taxable income is subject to seven tax brackets. The framework will consolidate the current seven tax brackets into three brackets of 12 percent, 25 percent and 35 percent (35 percent being the current top tax bracket).
Under the existing tax code, taxable income is subject to seven tax brackets as previously indicated. The framework’s goal is to consolidate the current seven brackets into three brackets of 12 percent, 25 percent and 35 percent. There may be an additional top tax bracket to ensure that the reformed tax code is at least as progressive as the existing code and does not shift the tax burden form high-income to lower- and middle-income taxpayers.
Generally, higher income taxpayers itemize deductions for the most part. This is due, in part, to mortgage interest and taxes paid (income and real estate taxes as an example). Higher earning individuals also tend to make larger tax deductible charitable contributions that are not made by lower- and moderate-income families.
The framework, to simplify the current code, proposes to eliminate most itemized deductions, but retains tax incentives for home mortgage interest and charitable contributions. This, in my view, helps middle-income taxpayers in addition to higher-income families. However, I believe there will be pushback on eliminating the deduction for state and local income taxes.
My solution is to allow a deduction for real estate taxes. This will help all taxpayers regardless of the income level. Of course, those living in high tax states — New York, California and New Jersey as an example — will object to this as well. I believe, however, that this deduction will be legislated out!
The framework retains tax benefits that encourage work, higher education and retirement security. Tax reform will look to maintain or raise retirement plan participation of workers and resources available for retirement. No mention of social security however. A difficult benefit to play with, in my view.
Tax reform will provide for an enhanced child tax credit and middle class tax relief. The framework will repeal the personal exemption for dependents and increase the child tax credit. Additionally, a new non-refundable credit of $500 for non-child dependents to help defray the cost of caring for dependents. (Non-refundable meaning if you have no tax liability the $500 will not be refunded.)
The “hated” alternative minimum tax will be eliminated. According to the framework, it no longer serves its purpose and requires taxpayers to, in effect, do their taxes twice: once under the regular system and once under the alternative system.
The framework will repeal the death tax (estate tax) and the generation-skipping transfer tax. If this is repealed, I am curious what the states will do. Most states are not able to eliminate estate and/or inheritances taxes. In my view, I don’t believe there will be a wholesale elimination of the estate tax because it impacts only our wealthiest citizens. Time will tell.
Impact on business
Small business drives our economy and increases employment. The framework creates a new tax structure for small business — there are many PR firms that are considered “small business” — so they can better compete with the rest of the world, boosting both jobs and higher wages. Accordingly, the framework puts corporate tax rates below the average of other industrialized countries and promotes greater investment in American manufacturing. I support this concept 1000 percent!
The maximum tax rates under the framework, to be applied to small and family owned businesses conducted as sole proprietorships, partnerships and S corporations, will be 25 percent. The framework is aware that wealthy individuals may adopt measures to recharacterize personal income into business income to avoiding paying higher tax rates.
Tax rates for corporations will be reduced to 20 percent. In addition, it aims to eliminate the corporate AMT and the impact on “double” taxation of corporate earnings.
Businesses will also be able to write-off the cost of new investment in depreciable property other than structurers (real property) for at least five years. However, the deduction for net interest expense may be partially eliminated for corporations. Interest paid by non-corporate taxpayers will also be reviewed.
Certain tax credits such as the research and development credit the low-income housing credit will be retained.
I’ll keep you informed as more develops!
Richard Goldstein is a partner at Buchbinder Tunick & Company LLP, New York, Certified Public Accountants.