President Trump’s Plan for Tax Reform

September 29, 2017 | Chelsea Tucker

An overview of President Trump’s tax reform plan has been released, and while some areas may need additional detail for the effects to be fully understood, overall it appears to deliver on the promise of broad tax reform, at the individual, business, and international taxation levels.

Following are the salient changes from each category:

1. Individual Taxation:

  • Instead of the current standard deduction and personal exemptions based on the number of qualified family members, the standard deduction will be increased to $12,000 for single and $24,000 for joint returns, and the personal exemptions for the taxpayer (and spouse if filing jointly) will be eliminated. The increase in the standard deduction will nearly double, however the loss of personal exemptions for large families may decrease the overall deduction for certain taxpayers.
  • The current tax code includes seven tax brackets, ranging from 10% to 39.6%. The proposed plan would replace these with the following three brackets – 12%, 25% and 35%.
  • Congress has the option to enact an additional top rate, above the 35% bracket.
  • The Child Tax Credit will be significantly increased from its current $1,000 per qualifying child level, and the income levels that phase the credit out will also be modified to address the marriage penalty and so that more taxpayers can utilize the credit.
  • Alternative Minimum Tax (AMT) will be repealed entirely.
  • Itemized deductions are overhauled, limiting the deductions to mortgage interest and charitable contributions.
  • Estate and generation-skipping transfer (GST) taxes will be repealed.
  • The proposed plan also envisions repealing many other exemptions, deductions and credits currently in the tax code. Detail of these has not yet been provided.

2. Business Taxation:

  • Small and family-owned businesses conducted as sole proprietorships, partnerships, and S Corporations will no longer be considered pass-through entities where the income is recorded on the tax returns of the owners. Instead, each entity will have a maximum tax rate of 25% to be taxed and paid at the entity level.
  • The current C Corporation rates will be reduced to a maximum rate of 20%.
  • Corporate AMT will be repealed for corporations as well.
  • Businesses will have the option to expense capital expenditures, not including buildings, purchased after September 27, 2017 and for a period of at least five years, rather than capitalizing them and depreciating over time.
  • The deduction for net interest expense incurred by C Corporations will be partially limited.
  • The Domestic Production Activities Deduction will be eliminated. In addition, numerous other special exclusions and deductions will be eliminated.Two business credits have been singled out to be preserved: The Research & Development credit and the low-income housing credit.

3. International Taxation:

  • The current tax code is based on a worldwide tax system. The proposed plan transitions the code to a territorial model.
  • To replace the worldwide system, a 100% exemption for dividends from foreign subsidiaries (in which the U.S. parent owns at least a 10% stake) will be enacted.
  • Foreign earnings that have accumulated overseas under the current tax code will be treated as repatriated earnings in the United States. Those earnings held in illiquid assets will be subject to a lower tax rate than foreign earnings held in cash or cash equivalents. The payment of the tax liability will be spread out over several years.

The changes to the tax code listed under the proposed plan, if enacted, would result in the largest change to taxation in the United States since the tax code was reformed in 1986 under President Reagan.

We will work to keep you up to date as more information becomes available. If you have any questions or concerns, please don’t hesitate to reach out to us.