The President’s Tax Proposal is Short on Details

May 3, 2017

 

The administration posted an outline of its tax reform proposal on April 26th, but an outline is all we have so far.

 

The big changes they propose are:

 

  • Reduce individual income tax brackets from seven to three-10%, 25% and 35%.  But they don’t mention what income levels the rates apply to.

  • Individuals would get a doubling of the standard deduction, but lose itemized deductions other than home mortgage interest and charitable contributions.

  • The Estate Tax and Alternative Minimum Tax would be repealed.

  • The tax rate on business income from “Pass-through” entities like partnerships, LLCs and S Corporations would be taxed at only 15%.  Currently that income can be taxed at up to 39.6%. This single proposal opens a laundry list of ideas for tax savings, and brings along the possibility of abuses that often arise when there are significant tax rate differentials between types of income.  Keep in mind that the tax rate for personal service income (medicine, law, accounting, etc.) has been different than other types of businesses since 1986. Information about rates that might apply to personal service income versus other types of business income is left out of the proposal.

  • Regular Corporations would see their tax rate lowered from 35% to 15%.  Also, they will be given a discounted rate to return profits currently held overseas to the US, but that rate was not disclosed yet.

  • The 3.8% net investment income tax surcharge (for “Obamacare”) would be repealed.

 

Without any further details, it’s way too early to make any plans.  The ideas must be reconciled with Congressional ideas before any legislation gets started. Further, without the 60 votes in the Senate to pass permanent legislation, it's likely any tax package that does get passed will expire after 10 years.

 

So stay tuned, and remember that it’s unlikely the proposals will become law in their current state.

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