You might remember back in April, the Trump administration released its first take on a tax reform plan. As I said at the time, that plan was essentially a bullet point list on a single sheet of paper and was completely devoid of details. Six months later they have now released a "framework" for tax reform that still lacks details but which now spans a whopping NINE pages! Look, I understand the tax code is incredibly complex and it will take a while to put together a comprehensive reform plan, but it would be nice to get some details regarding the various aspects of the plan. While we don't know a lot more than we did in April, we can at least see where the administration is going to focus their efforts on tax reform.
I outlined seven major points in my initial analysis of the tax reform plans, so let's return to those points and see where they stand under the revised proposal:
- Business Tax Rate - The originally proposed "15% business tax rate" has been revised to 20%. President Trump has reiterated that 20% is "very much a red line," indicating he will not let this go any higher.
- Pass Through Entities - While the initial one page document didn't specifically mention pass-through entities, there were inidications the administration wanted to include these entities in the corporate tax cuts. The new plan specifically outlines a 25% top tax rate for "the business income of small and family owned businesses conducted as sole proprietorships, partnerships and S corporations". It also explains that "the committees will adopt measures to prevent the recharacterization of personal income into business income to prevent wealthy individuals from avoiding the top personal tax rate," but we are not given any details on how this might be accomplished.
- Individual Tax Brackets - The original plan outlined a consolidation from the current seven bracket tax structure to just three brackets: 10%, 25% and 35%. The only revision to this in the latest proposal was to increase the 10% bracket to 12%. However, there is still no detail on what income levels will be the breakpoints for these new brackets.
- Alternative Minimum Tax - The original plan proposed repealing the Alternative Minimum Tax completely and the new proposal keeps that in place.
- Net Investment Income Tax - The original plan proposed repealing the 3.8% surtax on net investment income that has been in place since the Affordable Care Act was passed. This has been dropped in the new proposal.
- Estate Tax - A full repeal of the estate tax (or in their terms the "death tax") was included in the initial proposal and is in the revised version, and they have added the generation skipping transfer tax to this. There was no mention of the gift tax or any details about potential capital gains tax due on death or the elimination of step up in basis at death, as has been discussed previously.
- Itemized Deductions - Not much has changed here from the original proposal. The plan still calls for the doubling of the standard deduction and the elimination of most itemized deductions except for charitable contributions and mortgage interest. The state tax deduction, which is the largest deduction for many taxpayers, is notably not mentioned and presumably would be eliminated.
There are a number of other provisions included in the plan, but these are the the biggest items that would have the highest impact on many of our clients. Without more details it's impossible for us to gauge how the bill would impact individual clients but we are actively working with other top CPAs around the country on tax planning ideas should any of these changes eventually be implemented. Of course we will continue to monitor the progress of a potential tax reform bill and will be prepared to take action on any number of tax planning items before year-end should a bill get passed.
The views expressed represent the opinions of L.K. Benson & Company and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial or legal advice or service to any person.
Please see Additional Disclosures more information.