Audio Version: Let Me Hear It!
While many of us will defer holiday shopping until after Thanksgiving, it’s never too early to start making your list and checking it twice. Got your eye on a certain something? Add it to the list. Think of a great gift idea for a relative? Add it to the list. The Trump Administration has been doing the same. A couple of weeks ago, the Administration and Republican leadership jointly released their tax reform wish list, the Unified Framework for Fixing Our Broken Tax Code. Given the complexity of the proposal and the breadth of possible impact, we believe a Cliff Notes version is in order.
Reduction in the number of tax brackets. Think of tax brackets like steps on a ladder. All income is not taxed at the same rate, rather, it gets to ride through each bracket and is taxed along the way. The amount of income that falls in each bracket depends on your filing status (i.e., single or married). The current proposal would reduce the number of tax brackets from seven (10%, 15%, 25%, 28%, 33%, 35%, 39.6%) to three (12%, 25% and 35%) and leaves the door open to a fourth top rate to ensure wealthy taxpayers don’t pay a lesser share of income tax than paid today.
Elimination of exemptions with increase in the standard deduction. Exemptions are like gifts from the IRS, allowing most taxpayers to avoid tax on a small amount of income each year. Deductions are essentially approved expenses that the IRS allows you to subtract from income. Taxpayers may elect to take the greater of the minimum, standard deduction or itemized deductions. In 2017, as long as you file a return, you will get an exemption for you and your dependents of up to $4,050 per person. For example, if you are married with two children, your exemption amount would be $16,200 ($4,050 x 4). The 2017 standard deduction amount is $6,350 for single filers and $12,700 for married joint filers. The current proposal would eliminate the use of personal exemptions but roughly double the standard deduction amounts to $12,000 for single filers and $24,000 for joint filers.
Elimination of state and local tax deduction. In 2017, taxpayers who itemize deductions may deduct state income, sales, real estate or property taxes from the amount of income subject to federal income tax. The tax proposal would disallow this deduction from income.
Increase in the Child Tax Credit and phase-out limits. Currently, parents can get a tax credit of up to $1,000 per child under the age of 17, provided certain qualifications are met, but the amount may be reduced or eliminated if income is above a certain threshold ($75,000 for single filers and $110,000 for joint filers). The tax plan proposes an increase to both the credit amount and the income level at which the credit starts to phase-out, meaning that higher-income families could get more benefit from the credit.
Repeal of the estate tax. Currently, an individual may transfer up to $5,490,000 of wealth during his or her lifetime, or at death, without incurring a transfer tax. If approved, the tax proposal would eliminate tax on transfers, regardless of the size of an individual’s estate at death.
Elimination of the alternative minimum tax (AMT). Simply put, AMT is an alternative way to calculate tax liability. If this second equation results in a larger liability, then you will pay more. The proposal calls for an elimination of this second calculation.
There are also a handful of proposals directed at small business and corporate tax, including the reduction of the top corporate tax rate from 35% to 20% and the top rate on small businesses and family-owned businesses (conducted as sole proprietorships, partnerships and S corporations) to 25%. Much will be debated in the coming weeks as the proposal makes its way through Congress. The process is a bit like making sausage – how it starts and how it looks in the end may be very different. So, as with all legislative reform, we must wait and see.
