In late September, 2017 the president and his administration announced its tax reform plan, called The Unified Tax Reform Framework. Here’s an overview of what the tax plan would change and how.
Income Tax Brackets
America’s seven current tax brackets would shrink to three under The Unified Tax Reform Framework. There could potentially be a fourth bracket for 'high-income earners', but that has not been determined.
Income Tax Rates Will Lower
Under The Framework, the number of tax brackets will reduce - and so will the rates. The lowest bracket would fall to 12%, from 15%. The middle would drop to 25%, from 28%. The top bracket would see a new rate of 35%, down from 39.6%. The House Ways and Means Committee supports keeping the top one’s rate the same. The income ranges for these brackets were not specified in The Framework.
The proposed tax plan eliminates itemized deductions, except those on charitable contributions, retirement savings, and mortgage interest. With the proposed framework, Congress aims to cap 401(k) contributions at $2,400 yearly - which could potentially harm those over 50, who can put in up to $24,000 yearly into their 401(k)s. The House budget eliminated this deduction, but the president promises to keep it untouched. Its future will be determined at a later date.
Deductions for state and local taxes will be eliminated as well. This could alarm residents in states such as California, where taxes are high. To win taxpayers over in states such as these, Congress might allow them to choose between no state and local tax deductions or no state property tax deductions. Another option is to only eliminate the state and local tax deduction for those earning over $200,000 yearly in income.
The Framework also eliminates personal exemptions.This exemption currently allows taxpayers to subtract $4,050 from income for each person claimed on his or her tax return - i.e. a child. With the Framework, increases to the Child Tax Credit will be made, but the amount is currently unspecified. However, it will be increased so more middle-income families can take advantage. The Framework will allow a $500 credit for non-child dependents - i.e., an elderly parent.
Estate taxes, generation-skipping taxes, and the Alternative Minimum Tax will all be eliminated under the proposed Framework.
On the flip side, the president’s new plan doubles the standard deduction for everyone. For example, the deduction for married or joint filers will rise to $24,000 to $12,700. Single filers will see an increase to $12,000 from $6,300.
The current corporate tax rate will dip to 20% from 35% under the proposed plan. The maximum tax rate for small businesses will lower to 25%. This includes sole proprietorships, partnerships, and S corporations.
All businesses will be able to expense the cost of depreciable assets, as opposed to writing them off, which is the current best practice. C corporations - which are owned by shareholders and have a board of directors to oversee policy and decisions - will no longer be able to deduct interest expense. The Framework advocates for the installation of a 'territorial tax system.' This means the income U.S. businesses earn in other countries will not be taxed regularly. Instead, it would allow a one-time tax holiday on past income earned in other countries.
The Framework has already made it through the Senate and House (the Republican faction). In order for it to move forward, Congress has to work on the tax bill associated with the Framework. That happens in the House Ways and Means Committee and Senate Finance Committee. Each hopes to finish its specific plans by Thanksgiving of this year.
From there, the bill will go back to the full House and Senate in December. If it passes budget requirements, it can move through the Senate with a 51-vote majority. If the budget of the tax plan increases the national debt, it would need a 60-vote majority. If it passes there, the House and Senate would vote on a final plan and send it to the president. The process could ultimately take until sometime in January 2018.