By Nick Spoltore
On September 27, 2017, the Trump Tax Reform Plan (the framework of the “Big Six” group of Congressional and White House tax-reform precepts) was released. In the document, titled “Unified Framework For Fixing Our Broken Tax Code,” President Trump lays out four principles for tax reform at the core of this unified framework:
1. Make the tax code simple, fair, and easy to understand;
2. Give American workers a pay raise by allowing them to keep more of their hard-earned
paychecks;
3. Make America the jobs magnet of the world by leveling the playing field for American
businesses and workers; and
4. Bring back trillions of dollars that are currently kept offshore to reinvest in the American
economy.
Much has been written about the framework’s ostensible zero tax bracket. The standard deduction (currently $12,700 for MFJ and $6,350 for Single Filers) will roughly double to $24,000 for MFJ and $12,000 for Single Filers. The additional standard deductions for the elderly and blind are eliminated. The personal exemption is eliminated as well. The framework highlights that these changes effectively create a larger zero tax bracket by eliminating taxes on the first $24,000 of income earned by a married couple and $12,000 earned by a single individual.
However, a lot of taxpayers would be worse off. Let’s take the example of a taxpayer currently filing Head of Household. The framework does not provide a provision for Head of Household, so presumably a Head of Household will become a Single filer. Currently, a Head of Household with three dependent children who does not itemize can claim a $9,350 standard deduction and four $4,050 personal exemptions ($16,200). This $25,550 is a much better result than the $12,000 proposed under the framework. In essence, non-itemizers will be significantly worse off with the framework’s $12,000/$24,000 standard deductions as the number of dependents formerly entitled to the personal exemption increases.
The framework consolidates the current seven individual tax brackets into three brackets of 12%, 25% and 35%. An additional higher rate may be created to apply to the highest-income taxpayers. However, the framework does not list the corresponding income levels that will be attached to the 12%, 25%, 35% and possibly higher rate. Concerning other rate news, the corporate tax is reduced to 20%, and the pass-through rate would be 25%.
Itemized deductions, except for home mortgage interest and charitable contributions, would be eliminated. Incidentally, the “SALT” deductions for state and local taxes are clearly in jeopardy despite vows from politicians in high tax states to fight their repeal.
The framework touched on many other aspects of reform including expensing capital investments other than structures, repeal of the estate tax, and repatriation of foreign profits. This is an exciting time, and professionals need to stay on top of the latest in order to properly advise clients. Surgent will provide you the latest on tax reform with continually updated materials available in courses such as BFTU: Best Federal Tax Update Course and the monthly Trending in Tax Futurecast series.
Nick Spoltore is Senior Director of Tax & Advisory Content for Surgent CPE. Mr. Spoltore is a graduate of the University of Notre Dame and of Delaware Law School. Before joining Surgent, he practiced tax and business law at the firm of Heaney, Kilcoyne in Pennsylvania and also in Delaware.