White House and GOP Leaders Release Outline of Tax Reform Plan

The White House and top GOP leaders released their tax reform outline yesterday, as President Trump plans to unveil the new Republican tax-reform plan this afternoon at the Farm Bureau Building in Indianapolis. 

The President plans to position the tax reform proposal as a populist plan, especially beneficial for low-income earners. Republicans plan to collapse the number of brackets from seven to three. The standard deduction would nearly double to $12,000 for a single filer and $24,000 for married couples, meaning President Trump can accurately argue that many more low income earners would pay no tax under his plan.

This is the first volley towards an aggressive push to pass a tax reform plan with a very short legislative calendar for 2017. There is still some debate as to whether the outline released yesterday fully aligns with President Trump’s objectives. For example, the President continues to call for a 15% corporate rate versus the 20% rate proposed in the plan. 

There will be continued debate over the plan once the House and Senate tax writing committees review the revenue effects of the plan. Revenue neutrality remains a goal of Senate Finance Chairman Orrin Hatch, whose focus is clearly on the international reforms contained in the outline. We will continue to keep you informed on how this tax plan unfolds this fall. 

A summary of the tax reform outline is provided below:

Individuals

• The standard deduction would be doubled to $12,000 for single taxpayers and $24,000 for married couples.
• Most itemized deductions would be eliminated except those for mortgage interest, retirement savings and charitable contributions.
• The tax plan would condense the federal individual income tax brackets from seven to three with rates set at 12%, 25% and 35%.
• The child tax credit would be increased from $1,000 per child under the age of 17.
• Personal exemptions for dependents would be repealed.
• The zero-tax bracket would be expanded.
• A $500 tax credit would be created for taxpayers with non-child dependents.
• The individual alternative minimum tax (AMT) would be repealed.
• The estate tax would be repealed.
• The generation-skipping transfer tax would be repealed.

Businesses

• For small businesses that are pass-through entities such as sole proprietorships, partnerships, and S-Corporations, the maximum tax rate would be 25%. The reduced rate will likely not apply to professional service firms.
• For corporations, the maximum tax rate would be 20%.
• The corporate alternative minimum tax (AMT) would be repealed.
• The tax reform plan would allow businesses to immediately write off (or “expense”) the cost of new investments in depreciable assets other than structures made after September 27, 2017, for at least five years.
• There is currently discussion around eliminating numerous business tax credits except for the R&D credit and Low-Income Housing Tax credit.
• The domestic production deduction (IRC §199) would be repealed.

International

• The tax plan would transition the United States to a territorial tax system instead of a worldwide tax regime.
• The tax plan would give a 100% exemption for dividends from foreign subsidiaries (in which the U.S. parent owns at least a 10% stake).
• Corporations would be allowed to repatriate foreign profits without incurring additional taxes. 
• Accumulated foreign earnings held in illiquid assets would be subject to a lower tax rate than foreign earnings held in cash or cash equivalents.
• Corporate profits already accumulated outside of the United States would be subject to a one-time tax.  
• The tax plan would implement base-erosion provisions to protect the tax base, i.e., taxing at a reduced rate and on a global basis the foreign profits of U.S. multinational corporations.

Next Steps

The next step is for the House and Senate to agree on a unified budget resolution with instructions for tax reform. Despite uncertainty about the future of ACA repeal and replace and its possible inclusion in the FY18 budget resolution, the House may vote on its version of the budget next week. The Senate is likely to mark up its own budget next week, which could ultimately lead to a conference committee later in October to resolve differences between the two versions.

Alternatively, either chamber could adopt the other’s budget resolution.

As the budget process moves forward, the House Ways & Means and Senate Finance Committees will work toward agreement on legislative language that fleshes out the Framework’s principles. 

What Does CohnReznick Think?

The outline released yesterday is an overview of the more significant proposals being discussed at this time.  The final proposed legislation may differ considerably from what will ultimately be enacted. Given the possibility that tax reform may occur in the next year or so, individuals and businesses should monitor the tax reform proposals and developments, assess how such proposals will affect their particular facts and circumstances and incorporate the significant tax law changes into current planning.  We will continue to monitor the latest legislative developments surrounding tax reform.

Contact

For more information, please contact Robert C. Moss, Principal, National Director of Governmental Affairs, at [email protected] or 617-648-1406 or Richard Shevak, Principal, National Tax, at [email protected] or 862-245-5029.

Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.