On Thursday, October 19th, in the first step toward enacting tax reform and/or tax cuts, the U.S. Senate passed a 2018 budget resolution and accompanying “reconciliation instructions” that allow the Senate to adopt a tax bill that adds up to $1.5 trillion to the deficit over the next 10 years without being subject to a filibuster. Many commentators believe only tax reform or tax cuts that can be approved without the filibuster can be passed.
President Trump and the senior Republican members of the House and Senate announced their goals late in September in a plan called the “Unified Framework for Fixing Our Broken Tax Code” (the “Framework”). The Framework identifies the sweeping changes to the tax code that the leadership hopes to achieve, but specifics and substantive details were left for Congress to determine.
For individuals, the Framework proposes the following:
- Consolidating the current seven individual income tax brackets (ranging from 10% to 39.6%) into three brackets of 12%, 25%, and 35%, with the possibility of a fourth, undetermined bracket applicable to top earners (no details are provided on the income thresholds for the brackets);
- Eliminating the individual alternative minimum tax;
- Eliminating all personal exemptions;
- Eliminating all itemized deductions except for the home mortgage interest and charitable donations deductions (note: the elimination of the deduction for state income and property taxes has already caused much concern for both parties in many states);
- Increasing the standard deduction to $12,000 for single filers and $24,000 for joint filers;
- Increasing the child tax credit to an unknown amount, with the first $1,000 being payable to the taxpayer regardless if any taxes are actually owed;
- Providing a $500 credit for non-child dependents (such as elderly parents);
- Simplifying and expanding tax benefits for work incentives, higher education, and retirement in yet unspecified ways; and
- Eliminating the estate tax.
For corporate and business taxes, the Framework proposes the following:
- Reducing the tax rate on corporations to 20% (down from 35%);
- Limiting the maximum income tax on non-service-related income from pass-through businesses, such as sole proprietorships, partnerships, and S corporations, to 25%;
- Eliminating the corporate alternative minimum tax;
- Exploring ways to reduce double taxation on corporate earnings;
- Allowing the immediate expensing of newly acquired depreciable assets for at least the next five years;
- Partially eliminating the deduction for net interest expenses;
- Providing for the exemption from tax of dividends from at least 10%-owned foreign subsidiaries;
- Eliminating numerous corporate special exclusions and deductions except for the research and development and low-income tax credits; and
- Providing for a one-time deemed repatriation of foreign earnings at a reduced rate.
It is important to reiterate that the Framework is simply intended to serve as guidelines to the legislative drafting committees, and the details will be crucial in determining the ultimate impact of the above proposals. As the old saying goes, “the devil is in the details.”
Further updates will be provided in future alerts as specifics of any tax reform legislation become clearer. In the meantime, if you have any questions regarding how the proposed tax proposals may impact you, please contact Serge Bechade, the author of this alert, at 617.456.8016 or [email protected], or Robert Maloney, the chair of the Corporate Practice Group, at 617.456.8008 or [email protected].