Proposed Tax Reform-What May be Different

The Tax Cuts and Jobs Act was released last week which outlined the biggest transformation of the U.S tax code in more than 30 years. House Republicans shed some light into the details of the plan, even though The House Ways and Means Committee will most likely modify some components. The hope is to turn the bill into law before Christmas. This may be a stretch! If it is delayed until 2018, the tax changes will then affect your 2019 return. Much more work will be done due to opposition and lobbyists protecting their special interests. We believe it is important to discuss some of the components that have been outlined already. Although, the details of each topic are not set in stone, it will provide some insight into the direction Congress is headed.

Individual Tax Brackets

The simplest proposed component of the tax code is a compression of individual tax rates. Currently there are 7 tax brackets (10%,15%,25%,28%,33%,35%,39.6%) and each have specific thresholds you must meet before you pay the next higher marginal tax rate. The proposed tax code only has 4 tax brackets (12%,25%,35%,39.6%) and the thresholds for each specific rate will increase as well.

For example, let’s say an individual taxable income for the year is $60,000. Under the current tax code the individual would pay 10% up to $9325. 15% from $9325 to $37,950 and the remaining at 25% up to $91,900. This individual would pay $10,738 in 2017. Under the proposed 2018 tax code the same individual would pay 12% up to $45000 and 25% for anything over $45,000, up to $200,000. The individual would pay $9150 if this bill was passed and signed into law.

Corporate Income-tax Rates

Another component of the plan calls for slashing the corporate tax rate from 35% to 20%. The U.S has one of the highest corporate tax rate when compared to other industrialized countries like Japan, Germany, U.K and China.  An additional change would be to allow a one-time repatriation tax on foreign profits at 12% for cash and 5% for illiquid assets.

We believe this could be a massive boost to the US economy.  Not only for profits earned in the U.S. but for foreign profits which are now kept overseas. Currently, companies pay a 35% tax to bring foreign profits back to the United States.  Therefore, a lot of companies stockpile these profits overseas to avoid taxation.  The total amount of asset stashed overseas is estimated near 2.5 trillion dollars.  Apple alone may have $256 billion in cash overseas.  The lower repatriation tax could allow trillions of dollars back into the U.S. economy.

Increase Standard Deductions

As a way to simplify the process of filing your tax reform, different itemized deductions may go away. The proposal may remove the medical expenses deduction or limit the mortgage-interest deduction.

To compensate for the changes to these deductions, the standard deduction would be raised from $6,350 to $12,000 for individuals and $12,700 to $24,000 for married couples.

Estate Tax

The last component we would like to discuss is the proposed estate tax change. Currently, the House GOP Plan calls for doubling the estate tax exemption. The current exemption is $5.5 million for individuals and $11 million for couples. By doubling this exemption, you would essentially repeal this tax, since many do not have estates larger than the exemption.  Only, the largest of estates would still pay estate taxes. Also, it is important to note, a phase out and full repeal of the estate tax is proposed within six years.

Summary

As we approach the end of 2017, we realize a lot more work needs to be done before The Tax Cuts and Jobs Act gets passed.  What was originally proposed, will most likely not be the final product that is voted on by Congress.  We briefly touched on changes to individuals and corporate tax rates, elimination of some itemized deductions, increases in the standard deduction and removal of estate taxes.   We hope this gives you a little more insight into the proposed tax reform agenda.   However, stay tuned, more changes are likely to follow. 

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