The Internal Revenue Code is currently structured as one of the most complicated and confusing tax codes in the world. While the U.S. tax code provides a great way to get your children to sleep (what tax accountant has not tried this neat trick), it is not the most effective system, and many have called for its revision for years. Since the election in November 2016, many Americans have anticipated the reform of the income tax code. The question on everyone’s mind has been how will tax reform affect me and my business?
On September 27, 2017 the Trump Administration, along with the House Committee on Ways and Means and the Senate Committee on Finance released a unified framework on tax reform. The framework contains provisions which would impact both businesses and individuals.
On the business front, major changes include reducing the top corporate tax rate from 35% to 20%, allowing businesses to expense the cost of new investments in otherwise depreciable assets other than structures (presumably personal property) for a period of at least 5 years and limiting the tax rate applicable to business income from small and family owned businesses to 25%. Also for businesses, many special exclusions or deductions would be eliminated, repealed or restricted, such as the domestic production deduction under Internal Revenue Code Section 199. Many of the business incentives are deemed no longer necessary due to the corporate rate reduction and new benefits such as the expensing of capital investments.
There is good news for our LIHTC developers. The framework explicitly includes preservation of the low-income housing tax credit and the Research and Development Tax Credit. Both of these credits are deemed by the framework to be important to the American economy and effective in promoting policy goals. Other business credits may not fare as well because the framework includes the possibility to repeal them. The Sherbert Group is working with various legislators and coalition members to demonstrate the importance of the Historic Rehabilitation Tax Credit to ensure that this will be one of the other business credits which is retained.
On the individual front, there are many provisions contained in the framework. The first major provision is the increase of the standard deduction. The framework proposes to increase the standard deduction for married taxpayers filing jointly to $24,000 and for single filers to $12,000. In conjunction with the increase in the standard deduction, the framework proposes to eliminate all personal exemptions.
The next major provision is to modify the tax rate brackets because the current tax code has seven tax rate brackets. The framework proposes to consolidate these into three brackets of 12%, 25% and 35%, but the framework does not provide the levels of income which would fall into each bracket.
In addition to these two major provisions, the framework proposes to increase the child tax credit which currently stands at $1,000 per child. The framework does not state how much the increase would be but does state that the first $1,000 of the credit will be refundable. In conjunction with the increase in the child tax credit, the framework proposes to increase the income levels at which the credit will begin to phase out, presumably opening the credit to taxpayers whose income exceeds the current phase-out amounts. Also provided for in the framework is a non-refundable $500 credit for non-child dependents.
Other provisions of the framework include the recommendations to repeal the Alternative Minimum Tax (both for individual and corporate filers), repeal the death tax and generation-skipping transfer tax, retain tax benefits which encourage individuals to work, seek higher educational opportunities, and invest for retirement security. The framework proposes to eliminate many Itemized Deductions, while maintaining the mortgage interest deduction as an incentive for home ownership and preserving charitable contribution deductions. Major itemized deductions that would be eliminated under the framework are tax deductions for state income taxes and real estate taxes.
The next steps in the process will be for the House Ways and Means Committee to work on a bill to enact legislation which would then go before the full House of Representatives and then for the Senate Finance Committee to work on a bill to enact legislation and then would go before the full Senate. Afterwards, the House and Senate would need to collaborate on the legislation and work out any differences.
The Sherbert Group will continue to monitor the progress of pending legislation and we will provide updates once there is more definitive information. If you have any questions regarding the article, please email jbuckland@sherbertgroup.com .