“Framework” For Proposed Federal Tax Law Changes is Released

November 2, 2017

By Jonathan Samel, Esq.

On September 27, 2017, the Trump Administration and select members of Congress released a “unified framework” for tax reform. This document provides more detail than a number of other tax reform documents that have come from the Administration over the past few months, but it still leaves many specifics to be worked out by the tax-writing committees (i.e., the House Ways and Means Committee and the Senate Finance Committee).

The number of tax brackets for individuals would be reduced from seven to three: 12%, 25%, and 35%. Under current law, the lowest tax bracket is 10%, and the highest is 39.6%. It will be up to the tax committees to assign income ranges to each rate. The framework also leaves open the possibility that “[a]n additional top rate may apply to the highest-income taxpayers to ensure that the reformed tax code is at least as progressive as the existing tax code.”

The framework would double the standard deduction to $24,000 for married taxpayers filing jointly, and $12,000 for single filers.  However, it eliminates personal exemptions, which currently are $4,050 per person.

The framework calls for repealing the individual alternative minimum tax (AMT).

Many itemized deductions would be eliminated, including the state and local tax deduction.  However, the framework would retain tax deductions for home mortgage interest and charitable contributions.

There is no proposal regarding the tax treatment of capital gains and dividends. The framework calls for preserving tax benefits for “retirement security,” which probably refers to the current tax treatment of 401(k), IRA, and defined benefit plans.

The framework calls for the repeal of both the estate tax and the generation-skipping transfer tax.

The maximum tax rate applied to the business income of “small” and family-owned businesses conducted as sole proprietorships, partnerships and S corporations (where income passes through to the owner’s personal return) would be 25%. The framework “contemplates that the committees will adopt measures to prevent the recharacterization of personal income into business income to prevent wealthy individuals from avoiding the top personal tax rate.”

The tax rate for C corporations (no pass through of income to the shareholder’s personal return) would be reduced to 20% (down from the current top rate of 35%).

The framework would allow businesses to immediately write off (i.e., expense) the cost of new investments in depreciable assets (other than structures) that are made after Sept. 27, 2017 for at least five years.

The framework states that, because of the rate reduction for businesses numerous special exclusions and deduction would be repealed or restricted.  However, the research credit and the low-income housing tax credit would be retained.  It also leaves open the possibility of the committees retaining other business credits “to the extent budgetary limitations allow.”

Our office will continue to follow the progress of the proposed revisions to the tax law. Please contact us if you have any questions regarding your personal or business tax planning in light of the current uncertainty of exactly how the tax law will end up being changed.

Questions Every Business Must Ask

Q. Has your business recently reviewed its legal structure to determine whether it is set up in the most advantageous manner for legal and tax purposes, considering recent developments and changes in the law?

Q. Do the owners of your business have a current, updated buy-sell agreement which controls how ownership interests in the business are to be transferred in the event of an owner’s death, disability or termination of employment?

Q. Have the owners of your business developed a succession plan to define how ownership and authority will transition upon the death or retirement of the present owners?

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