The Republican members of Congress just released a proposal for their vision on tax reform. This is an issue we’ve been hearing about since Trump’s campaign, and many of us may be wondering what it means this time around. Some issues have been addressed with more specificity than before, but some issues are still lacking in details. In any case, the GOP has made clear that their intention is to pass tax reform and soon, so keep reading for a little more about what we know about the situation as it currently stands. And as always with new legislation, this will be an evolving issue.
When and How it Could Happen:
The proposal announced by the GOP on September 27, 2017 is not a bill that has been introduced, it is simply an announcement of their intentions. However, Republicans are looking to move quickly; it is their desire to pass tax reform by the end of 2017. To do so, they need to pass a budget resolution first – their hope is to have that accomplished by next week. After that, they will formally introduce the tax reform bill and will be able to utilize a special procedure called reconciliation. This will allow the GOP to pass the bill with a simple majority and prevent Democrats from filibustering, a typical Senate measure of delaying or preventing a vote on a bill.
So What Does it Mean for Me?
Individuals
Changes in deductions. The standard deduction will be nearly doubled, but the option to itemize will still exist. However, the only itemized deductions available will be mortgage interest and charitable donations, and these would have to exceed the new higher standard deduction amounts to be of any benefit. This means more taxpayers will likely take the standard deduction. Also, the personal exemption will be eliminated – this is kind of like another deduction, that most lower and middle class taxpayers are able to utilize,. The elimination will have a particularly large effect on taxpayers with multiple dependents. Whether these shifts will have a net positive or negative effect depends on the individual situation.
Increase the child tax credit. Amounts and specifics regarding this have not been released.
Elimination of the alternative minimum tax and the estate tax. These both tend to affect only the very wealthy. The AMT will particularly affect investors, but there are other instances which can trigger AMT and a quick check to your previous tax returns can tell you if you have paid AMT in the past. The estate tax kicks in when a deceased individual leaves behind an estate of $5.49 million or more.
Businesses
Partnerships and S Corporations. Income from these entities will be taxed at a flat 25%, rather than the current system where they are taxed at the individual owner’s tax rate on their 1040 return. Again, this could result in more or less tax paid, depending on the individual’s tax rate which could currently be higher or lower than 25%.
C Corporations. The proposal seeks to reduce the corporate tax rate from 35% to 20%. In addition to this, the domestic production activities deduction (DPAD) will be eliminated, which will affect companies that are in industries such as manufacturing or construction. Other deductions not specified will also be repealed. The proposal says domestic manufacturers will see the lowest marginal tax rates in 80 years, but as always, this will depend on the company itself.
Immediate deduction of assets. New rules will allow greater ability to deduct assets (except buildings) in the year they are purchased instead of spreading out the deduction via depreciation. Specifics not yet released.
Businesses with foreign operations. If you business is involved in global trade, contact your tax advisor for more assistance.
The changes could have a net positive or net negative effect depending on each individual situation. Changes are likely to come and we at GMLCPA will be monitoring the situation. If you would like to get a head start on understanding how your tax situation could be affected, please contact us for more guidance.
