Late week's Republican tax plan appears to have the support of the President, but passing a bill through the Senate will be a more difficult task as the GOP holds a slim majority in the House. The plan will likely go through some changes before becoming law - if it becomes a law at all. Here are some of the key current provisions impacting our clients
1. Corporate Tax Rate
The current corporate tax rate of 35% would be lowered to 20% and there would be a one-time tax break allowing corporations to repatriate overseas profits to the United States.
Very few of our clients are C-Corporations and most are “pass-through” corporations. There may be relief as the proposal would allow 30% of a pass-through entity’s profits to be taxed at a preferred rate of 25%. Unfortunately, it appears that companies that perform services like medical, dental, legal, accounting etc., will not be eligible for these rates. More than any other provision in this plan we feel that this one will need further clarification of how exactly it will work.
Individual Tax Changes
2. Tax Brackets
The proposed plan reduced the current 7 brackets down to 4. In a surprising move, the top rate will remain at 39.6%, which is the higher rate that was passed during the Obama administration. The new rates would be 12%, 25%, 35% and 39.6%.
3. Standard Deduction
The standard deduction would be nearly doubled for a married couple to $24,000. It is thought that this change would eliminate the need for many to itemize deductions like mortgage interest, charitable contributions, and taxes.
Exemptions for taxpayers and their dependents would be eliminated in this plan.
5. State and Local Taxes
State and local taxes would no longer be a deduction.
6. Real Estate Taxes
The real estate tax deduction would be capped at $10,000 each year.
7. Mortgage Interest
The deduction would remain unchanged on current homes, which allows interest related to the first $1,000,000 of debt on a primary residence as a deduction. The new tax plan does lower the limit the deduction on new home purchases to interest on the first $500,000.
8. Alternative Minimum Tax (AMT)
The AMT would be eliminated in this plan.
9. Estate Tax
The Estate Tax would be eliminated in this plan. Of all the pieces of this proposal, we expect this one to face the most scrutiny as the current law allows a married couple to protect nearly $11,000,000 of assets from the Estate Tax. This shelters a significant amount of wealth, so the removal of the Estate Tax all together is seen as an aggressive move that provides a tax break only to the uber-wealthy.
10. Child Credit
This would increase to $1,600 per child versus the current $1,000. It would also allow a small credit for college-aged children and for people providing care to their parents.
So How Does this Impact You
We’ve recalculated several tax returns across the income spectrum and found a lower tax bill in every case - particularly for the lower-middle class to middle class. While some deductions are lost, the impact is mitigated by a flatter and more gradual tax rate. The repeal of the AMT will also have a net positive effect. In previous years, many of our clients lost the real estate tax deduction, exemptions, and state tax deductions with the levying of AMT, so the elimination of these deductions doesn’t necessarily have a material impact.
On balance, this plan does accomplish what Republicans set out to do. It makes tax compliance easier for many people and it does remove some special interest deductions. Whether it goes far enough (or too far) is a matter of opinion, and no doubt the opinion makers will cloud the debate that is about to ensue.