Major Tax Reform: What is Proposed

There is now a ton of media chatter about the recently introduced federal tax reform package being passed around in Washington, D.C. While it’s still early in the process, here are some of the key elements of the current proposal.

For individuals

• Individual tax rate brackets trimmed to three rates of 12, 25 and 35 percent, down from the current seven brackets.
• Nearly doubling the standard deduction, to $12,000 for individuals and $24,000 for joint filers.
• Eliminating all but two itemized deductions: home mortgage interest and charitable deductions.
• Eliminating personal exemptions for dependents, but increasing the Child Tax Credit.
• Repealing the estate tax.
• Repealing the Alternative Minimum Tax (AMT).

For businesses

• Cutting the top corporate tax rate to 20 percent from 38 percent.
• Capping at 25 percent the tax rate for pass-through corporations including sole proprietorships, partnerships and S corporations (down from the current 39.6 percent max).
• Shifting international taxation to a territorial system, encouraging U.S. corporations to repatriate earnings from foreign subsidiaries.
• Allowing full expensing of business investments, rather than the standard depreciation model.

It is far from the finish line

Please recall that much needs to occur before any tax reform proposal makes its way into law. There is sure to be much discussion over a few points, including:

• The current proposal does not account for how any federal revenue shortfall created by this reform will be addressed, nor how it will impact government spending.
• Many constituents will battle to retain their deductions. For example, being able to deduct state and local taxes on a federal return is very important for residents of high-tax states such as New York and California.
• With the elimination of so many deductions and the increase in the standard deduction, fewer taxpayers may decide to use itemized deductions if this reform is passed. This could impact the value of the home mortgage interest and charitable contribution deductions.
• Taxpayers in the lowest income bracket see their rate rise to 12 percent from 10 percent. The proposal authors says this will be offset by the higher standard deduction.

Action required?

Given the Republicans’ slim margin of seats in both the House and the Senate, any defection within their ranks could derail this legislation. This was the fate of the health care reform bill earlier this year. Because of this, the best course of action is to wait and see. Whatever ends up happening in Washington, rest assured that you’ll be informed of what you need to know, and help will be available to review any of the changes as they impact your situation.