Tax Reform

From the Desk of Michael T. McCormick

Tax Reform

Looks like a coalition of Administration, Senate and House leaders have reached a tentative tax plan. The below is a rough outline of proposed changes. As this is debated in the halls of Congress, I will have a more detailed analytic when we get closer to an actual bill that would be voted on.

Personal Income Taxes:

Tax brackets
The current seven tax brackets would be consolidated into three brackets, with rates of 12 percent, 25 percent, and 35 percent, which would leave room for lawmakers to add a higher fourth bracket rate to apply to high-income taxpayers. It suggests that brackets should be indexed to “a more accurate measure of inflation,” which may refer to chained CPI.

Standard deduction
The current standard deduction of $6,350 for single filers and $12,700 for married filers would increase to $12,000 for single filers and $24,000 for married filers. The additional standard deduction and the personal exemption for filers would be eliminated.

Itemized deductions
Several itemized deductions would be eliminated, without identifying specific provisions, while preserving the mortgage interest deduction and charitable deduction.

Family tax credits
The personal exemption for dependents would be replaced with an expanded nonrefundable portion of the child tax credit (amount not specified) and a new $500 nonrefundable credit for non-child dependents. It looks to increase the phaseout thresholds for the child tax credit.

Other tax credits
The tax credits for work and higher education would be preserved, which likely refers to the Earned Income Tax Credit and the American Opportunity Tax Credit.

Capital gains and dividends
There is no proposal regarding the tax treatment of capital gains and dividends. It looks to preserve tax benefits for “retirement security,” which likely refers to the current tax treatment of 401(k), IRA, and defined benefit plans.

Alternative minimum tax
The alternative minimum tax would be eliminated.

Business Income Taxes:

Corporate tax rate
The corporate income tax rate would decrease from 35 percent to 20 percent. The corporate alternative minimum tax would be eliminated.

Pass-through tax rate
A new maximum tax rate on pass-through business income of 25 percent would be created. It calls for, but does not specify, rules for combating abuse of a top tax rate on pass-through business income that is lower than the top tax rate on wage income.

Capital investment
Full expensing for capital investment would be allowed for at least five years.

Tax treatment of interest
It calls for a partial limitation of the interest deduction for C corporations, with no additional details. It provides no details about the treatment of interest paid by pass-through businesses.

Business credits and deductions
The section 199 manufacturing deduction would be eliminated. Other business credits and deductions would be eliminated as well, but specific provisions have not been identified. The research and development credit and the low-income housing tax credit would be preserved.

International income
A move to a territorial tax system, in which foreign-source profits of U.S. companies are not generally subject to U.S. tax upon repatriation. It calls for, but does not specify, a global minimum tax intended to protect the U.S. tax base from cross-border income shifting.

Deemed repatriation
A one-time tax on previously accumulated foreign-source earnings would be enacted. It calls for a lower tax rate on liquid foreign assets and a higher tax rate on illiquid foreign assets, but does not specify either rate.

Other Taxes:

Estate tax
The estate tax and generation-skipping taxes would be eliminated.

Obviously, some HUGE changes if they get passed. Stay tuned…