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Ed Lyon Explains Trump's Latest Tax Reform Framework
The Trump administration and congressional Republicans have just released their latest tax reform proposal, grandly titled a "Unified Framework for Fixing Our Broken Tax Code." We're not sure anyone doubts that the code is broken, but time will tell whether this becomes the solution. The "framework" still lacks enough detail to tell us the full impact of the plan, and there will be plenty of change as it moves through Congress. Still, it's worth taking a first look at who might win or lose under the new proposal.
The plan itself is a fairly straightforward collection of changes, all of which have been suggested before, and many of which might gather bipartisan support in a less toxic, polarized Congress. On the individual side, it cuts brackets from seven to three (12-25-35%), doubles the standard deduction, eliminates the personal exemption, increases the Child Tax Credit by an unspecified amount, eliminates itemized deductions other than mortgage interest and charitable gifts, and repeals the Alternative Minimum Tax.
Conceptually, there's nothing new there, although of course, the devil is in the details. Where do those three tax brackets start and end? The answer to that question tells us who'll cheer louder, the House Freedom Caucus fans or "Bernie bros." (While we're on the topic, reporters who think that moving from seven brackets to three brackets means "tax simplification" are totally missing the point. Don't they know the real action is defining what income winds up in that "taxable" column in the first place?)
The plan also eliminates the estate tax and generation-skipping tax entirely. This won't affect more than a few thousand families per year, although it carries great symbolic weight.
Finally, on the business side, the plan cuts the top corporate rate to 20%, cuts the top rate on income from S corps, partnerships, and proprietorships to 25%, limits deductions for net business interest paid by taxable corporations, allows immediate expensing for non-real estate capital assets, eliminates the domestic production activity deduction, imposes a repatriation tax to bring back accumulated profits of foreign subsidiaries, and moves to a "territorial system" (taxing companies on U.S. earnings only) to level the playing field for American companies.
The business changes are likely to be more controversial than the individual changes, especially the lower top rate on pass-through income. Critics will ask why a hardworking small business owner should pay less tax than an equally hardworking salaried doctor, lawyer, or Indian chief.
Here's the real issue: is any of this actually going to pass? Pushing a square peg into a round hole is difficult enough, although doable if you have a big enough mallet. Pushing an estimated $4 trillion worth of net tax cuts into a $1.5 trillion budget opportunity is likely to prove far harder – especially in today's bitterly divided Congress. We're talking about remaking the entire tax code on a scale that hasn't been done since President Ronald Reagan and House Speaker Tip O'Neill could sit down for cocktails together at the end of a long day. That's a big reach, as the recent failure to move healthcare reform shows.
We can also expect some fierce criticisms of the tax plan's merits. Trump and the Republicans pinky-swear that the wealthy won't be getting a break. But critics will certainly attack estate-tax repeal, which benefits only the 0.02% of estates worth over $5.49 million. And raising the bottom bracket from 10% to 12% will also attract criticism, even though tax professionals understand that the proposed higher rate applies to a smaller base of income.
What does all this mean for us? Unfortunately, in many cases, those answers will be variations on "don't know yet," "your guess is as good as mine," and "beats the hell out of me." So we'll keep our eyes out for details like where the new tax brackets start and end, and how much higher the Child Tax Credit will go. And we're keeping an eagle eye on the debate so we can tell you as soon as possible what the plan looks like for you. If it means paying more, we'll be ready to pivot to new strategies to minimize those changes. If it means paying less, we'll be ready to help you take maximum advantage of the new law.
Article by Ed Lyon (Tax Coach)
Image by Mi Pham, Unsplash
October 3, 2017 /0 Comments/by Ed Lyon
https://financialgravity.com/wp-content/uploads/2017/10/mi-pham-223464.jpg 533 800 Ed Lyon https://financialgravity.com/wp-content/uploads/2018/01/FGLogo-blues-wo-tagline-high-res.jpg Ed Lyon2017-10-03 10:04:492017-10-03 10:04:49Ed Lyon Explains Trump's Latest Tax Reform Framework