If you’re like most taxpayers, tax reform (aka tax relief) can’t come soon enough. At the beginning of 2017, many of us anticipated lower taxes. As the year winds down, retroactive tax cuts are yet to be passed so hopefully you weren’t holding your breath while waiting.
Yet things are heating up. The hot buzzword, “tax reform,” has been upgraded to a new sexy term called “unified framework.” On Sept. 27, a unified framework for tax reform was released, which sets the foundation for Congress to shape legislation. The framework has notable changes from previous proposals. For some, hopes will be dashed while others will celebrate. Let’s see why.
individual tax rates and brackets
The number of individual tax brackets shrink from seven to three: 12, 25 and 35 percent. While the top bracket drops from 39.6 percent to 35 percent, don’t celebrate too soon if you are a high-income taxpayer. The framework leaves an opening to include an additional top rate for high-income taxpayers, leaving room for compromise. There is no indication where one bracket ends and another begins.
PERSONAL EXEMPTIONS AND STANDARD DEDUCTION
Personal exemptions are eliminated. The standard deduction nearly doubles to $24,000 for married taxpayers filing jointly and $12,000 for single filers. Blind or elderly taxpayers receive an additional deduction, though the amount is unstated. Sadly, the Head of Household filing status is on the chopping block.
Lower Corporate Tax Rate
The top corporate tax rate would drop from 35 percent to 20 percent. However, multinational corporations will face a repatriation tax on profits held overseas.
Tax Rate for Pass-Through Entities
Income of small businesses conducted as sole proprietorships, partnerships and S-corporations would be taxed at a maximum rate of 25 percent. Watch for loopholes to close on certain planning opportunities – the writing is on the wall.
EXPENSING OF CAPITAL INVESTMENTS
For at least the next five years, businesses would be allowed to immediately expense the cost of new depreciable assets (other than structures) purchased after Sept. 27.
FEWER ITEMIZED DEDUCTIONS
Most itemized deductions would be eliminated except mortgage interest and charitable contributions. This would be a huge blow for California taxpayers who get to write off their state income tax.
estate Tax ELIMINATION
The estate tax and generation-skipping transfer tax would disappear. No mention was made about the gift tax. Also silent was the income tax basis at death “perk.” This tax perk allows heirs to step up an inherited asset’s value to its fair market value at date of death.
ALTERNATIVE MINIMUM TAX REPEAL
The framework would eliminate the alternative minimum tax. AMT is arguably one of the biggest tax nuisances for the average taxpayer.
NET INVESTMENT TAX
The 3.8 percent net investment tax appears to stay for now. The framework is silent to its fate as well as the 0.9 percent additional Medicare tax on high-income earners. The net investment tax applies to certain high-income taxpayers. The surtax is imposed on interest income, dividends, capital gains, rental and royalty income, as well as other passive income.
CHILD TAX CREDIT
The child tax credit will significantly increase to an unspecified amount. Currently, taxpayers receive up to $1,000 per child under age 17, subject to phaseout limitations.
The framework hints at the likely repeal of many exemptions, deductions and credits for individuals in an effort to simplify a fairer tax code. Tax benefits will encourage work, education and retirement but details are yet to be drafted.
THE BOTTOM LINE
The stage is set for big changes in tax reform. Final legislation could significantly differ so plan closely with your CPA for its impact in 2018. ￼
Chris Thornburgh is a CPA and partner at Brown Armstrong Accountancy Corp. Contact her at email@example.com or 661-324-4971. The views expressed in this column are her own.