On Wednesday, Republicans released a framework for tax reform. The nine-page document titled “Unified Framework for Fixing Our Broken Tax Code” lays out a very broad basis for legislation, but there are still many details to be debated in the coming months.
For individuals, the framework provides lower rates, but a broader basis. The framework reduces the number of tax brackets for individuals from seven to three. The proposed rates are 12%, 25%, and 35%, however there is “flexibility” to add an additional top rate. Under the new plan, standard deductions would almost double to $24,000 for MFJ filers and $12,000 for Single filers. However, with the increase in standard deductions comes the elimination of many of the itemized deductions, as well as personal exemptions for taxpayers and their dependents. The specific itemized deductions that will be eliminated are not provided, however the framework still retains tax incentives for mortgage interest and charitable deductions. The framework increases the current Child Tax Care Credit and increases the income phase out levels so that more taxpayers will be able to utilize the credit. Lastly, the plan would repeal the existing individual Alternative Minimum Tax (AMT) and the death and generation- skipping estate taxes.
The framework limits the maximum tax rate for some pass-through income to 25%, however it does not provide specifics on which pass-through entities will be included. There has been talk in recent months that professional service firms will not be included, and it’s possible there will be additional types of income that will not be included. The new plan also proposes five years of immediate expensing of capital expenditures other than structures.
The framework reduces the corporate tax rate to 20%, eliminates the corporate Alternative Minimum Tax (AMT), and partially limits the deduction for interest expense for C Corporations.
In an attempt to keep US parent companies on a level playing field with foreign companies, the plan would exempt foreign earnings that have accumulated overseas when repatriated to the US. The plan also provides a 100% exemption for dividends from foreign subsidiaries in which the US parent company has at least a 10% stake. The framework also includes a reduced rate on foreign profits from US multinational corporations.
As a reminder this is solely a framework for future legislation and specific details will be decided by congressional bill writers in the coming months. If you would like a copy of the nine-page framework as released by Speaker of the House Paul Ryan please let us know.