Summary of Trump’s Tax Reform Plan
The Trump administration and select members of Congress have released a “unified framework” for tax reform. The document provides more detail than a number of other tax reform documents that have emerged over the past few months, but it still leaves many specifics to be worked out by the tax-writing committees of the House and Senate.
Individual provisions in the framework include:
- Reduced number of tax brackets
Under current law taxable income is subject to seven tax brackets (10%, 15%, 25%, 28%, 33%, 35%, and 39.6%). The framework would reduce the number of tax brackets to three (12%, 25%, and 35%). It is not clear yet where the proposed brackets would begin and end.
The framework states that “typical families in the existing 10% bracket are expected to be better off under the framework due to the larger standard deduction, larger child tax credit and additional tax relief that will be included during the committee process.”
The framework also leaves open the possibility that “an additional top rate may apply to the highest-income taxpayers to ensure that the reformed tax code is at least as progressive as the existing tax code.”
- Increased standard deduction and elimination of personal exemptions
The plan would nearly double the current standard deduction of $6,350 for single taxpayers to $12,000 and the standard deduction for married filing joint taxpayers from $12,700 to $24,000. The personal exemptions that taxpayers currently claim for themselves, their spouse, and each dependent child would be eliminated.
- Child tax credit “enhanced” and non-child credit provided
The framework states that it “significantly increases” the child tax credit, but doesn’t specify the increased amount. The first $1,000 of the credit would remain refundable.
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.
The framework would also provide a non-refundable credit of $500 for “non-child dependents.”
- AMT repealed
The individual alternative minimum tax would be eliminated.
- Itemized deduction changes
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, as well as the property tax deduction.
- Estate tax repealed
The estate tax and generation-skipping transfer taxes would be repealed.
Business tax provisions in the framework include:
- New top rate for S corporations, partnerships, and sole proprietorships
The framework includes that the top rate for these types of businesses 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.”
There is some question as to whether the income of service businesses would be able to use the 25% rate or whether those businesses would be subject to the top individual rate.
- 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 tax writing committees of the House and Senate “also may consider methods to reduce the double taxation of corporate earnings.”
- 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 changes
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.
- Other business deductions and credits repealed, but R&D and low-income housing credits retained
The Sec. 199 domestic production activities deduction would be repealed. The framework provides that “numerous other special exclusions and deductions” would be repealed or restricted. However, the framework would retain the research credit and the low-income housing tax credit. It also leaves open the possibility of the committees retaining other business credits “to the extent budgetary limitations allow.”
International tax provisions in the framework include:
- A one-time repatriation would be imposed to have companies bring back overseas profits. Officials have indicated that the rate would probably be around 10%.
The Trump administration hopes to push these tax reforms through before the end of the year. However most pundits believe that to be overly optimistic.