By Nick Hopkins, Director of Tax Services, Sponsel CPAs
After months of behind-the-scenes discussion and hype, the Trump Administration and GOP leaders have finally released their framework for a major overhaul of the U.S. tax code - the biggest of its kind in more than 30 years.
For now, many details remain sketchy and a lot of specifics remain to be worked out. And then there is the likelihood of multiple changes being made when - or even if - the plan starts to move through the legislative process. Given Congress' track record on major pieces of legislation so far this year, that's far from a certainty.
Still, we can look at the framework to assess the overall impact it might have, especially on individual taxpayers and businesses. The overall goal of this plan is to lower income tax rates for individuals and businesses, while eliminating some important deductions and simplifying the tax code.
The key components for business taxes are:
A reduction in the top corporate tax rate to 20 percent (down from 35 percent)
A new 25 percent rate for certain passthrough business income
International reforms that include a territorial tax system and a one-time mandatory repatriation tax
100 percent full expensing for the cost of new investments in depreciable assets for at least five years, effective after September 27, 2017, while partially limiting the deduction for net business interest expense
Aims to eliminate the corporate alternative minimum tax (AMT)
Repeal the Section 199 domestic manufacturing deduction and "numerous other special exclusions and deductions," but retains the research credit and the low-income housing tax credit
For individual taxes, the most important proposed changes are:
Replace the current seven individual tax brackets with three brackets with rates set at 12 percent, 25 percent, and 35 percent, with the possibility of a fourth higher rate for high-income individuals
Roughly double the standard deduction to $24,000 for married taxpayers filing jointly and $12,000 for single filers
Repeal personal exemptions
Increase the current $1,000 per-child tax credit by an unspecified amount
Eliminate the individual alternative minimum tax (AMT) and estate tax
Repeal “most itemized deductions,” though tax incentives for mortgage interest and charitable donations generally would be preserved, along with incentives for work, higher education and retirement security
It must be stressed that at this time the proposal is simply a framework for tax reform, and much of the specifics of legislation must still be worked out. Congress has to first pass a FY 2018 budget resolution, which could entail its own partisan challenges.
In addition, unless significant spending cuts are made, these tax cuts would potentially add to the federal government deficit in the years to come, with the goal of jump-starting economic growth and producing more tax revenue to close the gap. These sorts of revenue increases based on a burgeoning economy are notoriously hard to predict, which adds to the difficulty of selling the tax cuts to the American people.
Much remains in flux: the framework leaves many difficult policy issues to be resolved by the House and Senate tax committees.
Nick Hopkins is director of tax services for Sponsel CPAs.
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