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Tax Reform

The long awaited tax reform framework was introduced by the Trump Administration last week. It may be difficult to craft and pass, as the procedure Senate leaders plan to use will require no addition to the deficit in order for changes to be permanent.  This would require slashing existing tax breaks, almost all of which will have a very entrenched lobby fighting against it. While no one is certain if, or when, the legislation may pass, there are  positive highlights for businesses.  Many small businesses are run as pass-through entities such as S corporations, partnerships, and sole proprietorships. Currently no tax is levied on these businesses at the entity level; rather, the owner pays the tax on their share of the business income at the individual level, which can be as high as 39.6%.  The proposed legislation would cap the rate at 25% for these businesses.

For individuals, the proposed changes to the standard deduction, itemized deductions and exemptions will have an effect on taxable income.  The income range for the proposed individual tax brackets will also come in to play, though those have not been set.

As the plan is reviewed by the committee, it will be imperative to keep watch as the final decisions are made.

Highlights from the Tax Reform proposal:

  1. Individual income tax brackets: 12%, 25% and 35% — compared to the seven brackets currently in place. The income ranges for each bracket would be decided upon by the tax committee. A fourth bracket, set above 35%, later being added is a possibility.
  2. The standard deduction nearly doubles to $12,000 for individuals and $24,000 for married couples. The child tax credit will increase from $1,000 per child under age 17, however no figure has yet been given.  The income thresholds to qualify for the credit will also increase.
  3. Personal exemptions, currently at $4,050 per person, will be eliminated, increasing taxable income.
  4. Eliminates itemized deductions such as state and local tax, though the specifics have not been laid out. It is expected deductions for home mortgage interest and charitable contributions will remain, however, they may be modified.
  5. Aim to maintain or raise retirement plan participation of workers and resources available for retirement.
  6. Repeals the estate tax and generation-skipping estate tax, as well as the alternative minimum tax.
  7. The maximum tax rate on businesses income of pass-through entities would be 25%.
  8. Lowers corporate tax rate to 20%. The current rate is at 35%.
  9. Overseas profits of U.S. companies would no longer be subject to U.S. tax, instead a minimum foreign tax would be imposed. The rate has not yet been determined.
  10. Allow businesses to immediately write off loss of new investments in depreciable assets. Offset by reduction in the ability to fully expense interest.



Tax Reform Framework

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