On Wednesday, September 27, 2017, the Trump Administration, the House Committee on Ways and Means, and the Senate Committee on Finance released a tax reform framework, which the group hopes will be used by the tax-writing committees in the House and Senate to develop tax reform legislation. The framework is only meant to be a starting point for tax reform legislation, and leaves many difficult details to be worked out by Congress.

At this point, it is not clear if Congress will attempt to pass tax reform on a bipartisan basis or through budget reconciliation. Budget reconciliation allows legislation to pass the Senate with only 50 votes, but generally cannot create a budget deficit outside of a 10-year window. Accordingly, if budget reconciliation is used, it may be necessary (as with the tax cuts under the Bush Administration), to make the tax reform legislation temporary. 

The framework calls for the following tax reform proposals:

Individual Taxes

• The framework reduces the number of individual tax brackets from 7 to 3, with rates of 12%, 25%, and 35%. Currently, the highest individual bracket is 39.6% and the lowest bracket is 10%. There could also be an additional 4^th tax bracket with a rate higher than 35% applicable to the highest income individuals. However, the framework does not provide the income thresholds for each bracket. 

• The standard deduction would nearly double to $12,000 for individuals and $24,000 for married couples, but the personal exemption (currently $4,050 per person) would be eliminated. The proposal would increase the child tax credit (currently $1,000) to a yet to be determined amount, and would create a new $500 tax credit for non-child dependents (such as the elderly).

• Most itemized deductions, including the state and local tax deduction, would be eliminated. The mortgage interest deduction and charitable deduction would remain.

• The estate tax and alternative minimum tax would be eliminated.

Business Taxes

• The top corporate tax rate would be reduced from 35% to 20%.

• Income from pass-through entities, such as partnerships and S corporations, would be subject to a 25% tax, instead of subject to the owner’s individual tax rate. However, personal services conducted through a pass-through entity would continue to be taxed at the individual rate.

• For at least 5 years, businesses would be allowed to immediately write off the cost of new depreciable assets (other than structures), but the interest expense deduction for businesses would be limited (in a yet to be determined amount).

• Most business tax credits would be eliminated. However, the Research and Development Tax Credit and Low Income Housing Tax Credit would remain.

• Multinational businesses would generally only be subject to US tax on income earned within the United States. However, a global minimum tax may apply to some foreign income. A repatriation holiday would be implemented to allow US companies to repatriate accumulated foreign profits at a lower tax rate.