On Wednesday of this week, President Trump unveiled a new tax reform framework designed to reduce the complexity of the existing tax code while reducing or eliminating individual and business taxes.
The framework, which was negotiated by key members of the Senate and House of Representatives, known as the Big 6, provides an outline of the essential changes that Republicans would like to make. There are many issues that still need to be addressed before any wholesale changes could be made, including what to do with existing federal tax credits, deductions and other incentives. It’s important to understand that the framework is merely a starting point from which tax reform can be negotiated. There many challenges that need to be overcome before such changes could become permanent. The framework does provide important insight into what tax reform may look like in the immediate future. To help clients, prospects and others understand the changes and potential impact, Hanson & Co. has provided a summary below.
Individual Tax Changes
The framework reduces the number of tax brackets from seven to three, leaving only a 12%, 25%, and 35% tax rate. The income ranges for each bracket taxpayers would be placed into has not yet been decided. It’s possible that a fourth tax bracket could be added back in because the framework allows legislators the decision to add another rate above the proposed 35% if deemed necessary. Other significant changes include doubling the standard deduction to $24,000 for married couples and $12,000 for single filers but eliminating personal exemptions, worth $4,050 per person. It also includes a substantially higher benefit for taxpayers who leverage the childcare tax credit, while eliminating dozens of tax breaks, including the state and local tax deduction.
Other notable changes that impact wealthier individual taxpayers include a repeal of the estate tax and alternative minimum tax. There is specific mention in the framework that lawmakers retain particular tax incentives related to homeownership, retirement savings, charitable giving, and higher education. Because the framework doesn’t provide specific details, it’s impossible to predict what the final tax code will look like.
Business Tax Changes
The biggest change would be a reduction of the corporate income tax rate to 20% from today’s 35% rate. This change would give the U.S. a lower business tax rate than the average of all industrialized countries, which is 22.5%. It also calls for a reduction in the tax rates for small businesses and pass-through entities, reducing the top tax rates on profits to 25% down from 39.6%. There is flexibility incorporated into the framework that allows legislators the opportunity to include safeguards to prevent individuals from re-characterizing their wages as pass-through profits to receive a reduced tax rate.
There is also guidance on what changes should be made to the way multinationals are taxed. Currently, these companies pay a 35% tax on the overseas profit when it is repatriated to the U.S. The framework outlines a change to the tax structure that leaves these companies exempt from paying domestic taxes. They would only be required to pay taxes to the government where the income was generated. The idea is that the new tax structure will make U.S. companies more competitive on the global stage so they can use resulting profits for additional domestic investments in personnel and other resources. There would also be a low, one-time tax rate on existing overseas profits to further entice companies to bring that money back to the states. To prevent companies from shifting profits to low or no-tax havens, a minimum foreign tax would be imposed. The details and rate of the minimum tax have not been decided.
The tax reform blueprint provides important insight into the various changes the White House and Republicans would like to make in the coming months. Although it’s highly unlikely the changes outlined in the blueprint will be passed without changes, it does give a glimpse into how both businesses and individual taxpayers may be impacted if the direction of the reform is kept intact. If you have questions about the tax reform blueprint or need assistance with tax planning, compliance or other issues, Hanson & Co. can help. For additional information please call us at (303) 388-1010, or click here to contact us. We look forward to speaking with you soon.