"I think they can get it done. It's not a tax reform act, it's a tax cut act. I think that any politician that can't pass a tax cut probably is in the wrong line of business." -- Warren Buffett, Oct. 3, 2017
The Trump Administration, the House Committee on Ways and Means, and the Senate Committee on Finance released a nine page document last week outlining the new tax plan, aptly called The United Framework for Fixing Our Broken Tax Code. While short on specifics, the plan outlines four goals aimed at simplifying the tax code, cutting taxes, leveling the playing field for American businesses, and bringing back overseas business income. Here's a summary of the major changes that may affect how much tax you pay.
Fewer tax brackets
The new tax framework plans to simplify the tax code by reducing the number of tax brackets. The plan outlines consolidating the seven current tax brackets to just three at 12%, 25%, and 35%. Since income levels for each tax bracket are not identified in this framework, it is impossible to tell at this time whether the consolidation will help or hurt you (unless you're currently in the 39.6% bracket). However, the framework hints that an additional top tier rate may apply so taxes remain progressive.
Increase of standard deduction and child tax credit
The new plan proposes almost doubling the standard deduction with the goals of both decreasing and simplifying taxes. The standard deduction would increase to $24,000 for married joint filers and $12,000 for single taxpayers. The plan eliminates the personal exemption and consolidates it into the larger standard deduction. However, notably absent is the Head of Household filing status, which could hurt single parents.
The plan also aims to provide tax relief by increasing the child tax credit and increasing the income threshold at which a family is eligible to receive this credit. The framework also introduces a provision for a $500 tax credit for dependent care, which will provide some relief to the millions of Americans who care for older family members.
However, the framework identifies no specific information for how much of an increase the child tax credit will be or at what income level a family would be able to qualify for this credit. Since the proposal eliminates the personal exemption for dependents, we must wait for the tax-writing committees to do their work so we can see if this proposal will be helpful or if it will create an increased tax burden for larger families.
Elimination of Alternative Minimum Tax (AMT), itemized deductions, local and state tax write-off, and estate tax
The new tax framework proposes elimination of the AMT, the estate tax, and most itemized deductions. If approved, upper-middle and upper class taxpayers will no longer have to calculate itemized deductions only to find out that they must pay the higher AMT instead.
Most tax experts agree that the AMT, which was originally intended to make sure the wealthy paid their share of taxes, has increasingly affected upper-middle class from high personal income tax states or with larger families. Eliminating the AMT will be welcome to most; however, there's no indication of how the tax revenue lost from dropping the AMT will be replaced.
Most itemized deductions are also on the chopping block, with the exceptions of the home mortgage interest deduction and charitable donations. Also spared from elimination are tax benefits for higher education benefits and retirement security. While no specifics are mentioned, it is encouraging that the new tax framework promises measures to encourage and even raise retirement plan participation.
Notably missing from the framework is any reference to continuing the local and state tax deduction. Eliminating this write-off will certainly be unpopular for anyone who lives in a locality or state with a high tax rate.
Finally, the new tax framework eliminates the estate tax. The tax in its current form only taxes estates valued over $5.49 million. Therefore, most Americans will not be affected by the elimination of the estate tax.
Lower small business and corporate taxes
The new tax framework also addresses reducing taxes on businesses. If you're a small business owner, the maximum tax rate for sole proprietorships, partnerships, and S corporations will be reduced to 25%.
The framework also proposes reducing the corporate tax rate to 20% and includes other provisions for favorable tax treatment of corporations. Some economic research indicates that reducing the corporate tax burden should benefit Americans by providing the corporations the ability to increase worker wages or prevent the tax burden from shifting to the consumer in the form of increased prices for goods.
Here we go
With so many tax provisions left unfinished in the framework, the tax-writing committees have their work cut out for them. It's October, so there's little time to write legislation to flesh out the details for the massive tax reform proposal. With lawmakers eager to get something done, taxpayers will be watching Washington carefully during the autumn months to see what the final product ends up looking like.