CPA Comments on Republican Tax Reform
On September 27th the Republicans released their framework for tax reform. They have called it:
“UNIFIED FRAMEWORK FOR FIXING OUR BROKEN TAX CODE”
After reading, I would rename it:
“IDEAS TO CHANGE OUR TAX CODE: YET NOT ENOUGH DETAILS TO DETERMINE IF YOU WILL LIKE IT!”
Full disclosure, I voted for President Trump and believe that tax reform is much needed. That being said, I’m not impressed at all with the information they have released, because…well, it’s just not enough information.
Back in April when President Trump released his ideas for tax reform they were a bit broad and vague, but it was just an initial discussion with promises of more details to come. Well the time has come, and while a few more details have emerged, we don’t even have enough info to calculate a basic tax return under this proposed reform.
So how are we supposed to decide if we can even support it? Oh I forgot…we are just supposed to trust the politicians in DC…they will make it all work out, right? 🙂
If the Republicans want taxpayers on board they need to release more details so that we can actually run some tax returns under the proposed reform and help the public make an informed decision. Tax preparers are the best people to help the American people understand a tax reform plan since we can actually calculate the numbers! I just hope the Republicans give us the chance to do so.
Below is the exact text from the 9 page document released on Sept 27th…my commentary is in blue.
UNIFIED FRAMEWORK FOR FIXING OUR BROKEN TAX CODE
“It is now time for all members of Congress — Democrat, Republican and Independent — to support pro-American tax reform. It’s time for Congress to provide a level playing field for our workers, to bring American companies back home, to attract new companies and businesses to our country, and to put more money into the pockets of everyday hardworking people.”
President Donald J. Trump | Milwaukee Journal Sentinel | September 3, 2017
President Trump has laid out four principles for tax reform: First, make the tax code simple, fair and easy to understand. Second, give American workers a pay raise by allowing them to keep more of their hard-earned paychecks. Third, make America the jobs magnet of the world by leveling the playing field for American businesses and workers. Finally, bring back trillions of dollars that are currently kept offshore to reinvest in the American economy.
Thoughts on these 4 principals:
1) Agreed and hallelujah! Too much time is spent on taxes. It’s time we shift the hours spent on tax preparation towards financial and investment planning. Simplifying the tax code and filing will give people more time to focus on saving for their futures…which we desperately need b/c so many Americans are NOT saving enough to support themselves later in life.
2) Sounds nice…but until you release the tax brackets and details of the increased child tax deduction (see pg 5), I can’t even run a tax return under this proposed reform to prove this out.
The President’s four principles are consistent with the goals of both congressional tax-writing committees, and are at the core of this framework for fixing America’s broken tax code.
Too many in our country are shut out of the dynamism of the U.S. economy, which has led to the justifiable feeling that the system is rigged against hardworking Americans. With significant and meaningful tax reform and relief, we will create a fairer system that levels the playing field and extends economic opportunities to American workers, small businesses, and middle-income families.
The Trump Administration and Congress will work together to produce tax reform that will put America first.
The Trump Administration, the House Committee on Ways and Means, and the Senate Committee on Finance have developed a unified framework to achieve pro-American, fiscally-responsible
tax reform. This framework will deliver a 21st century tax code that is built for growth, supports middle-class families, defends our workers, protects our jobs, and puts America first. It will deliver fiscally responsible tax reform by broadening the tax base, closing loopholes and growing the economy. It includes:
-Tax relief for middle-class families.
-The simplicity of “postcard” tax filing for the vast majority of Americans.
Nice! This is how it should be for most Americans. People should understand how their taxes are calculated and it’s preposterous that everyone has to pay someone or some tax software company to prepare/file their taxes.
Granted, this may land me and thousands of tax preparers out of jobs, but I think we can pivot our skills and start offering affordable financial planning/investment advising services so we can really help our clients save and build wealth for themselves and their families.
-Tax relief for businesses, especially small businesses.
-Ending incentives to ship jobs, capital, and tax revenue overseas.
-Broadening the tax base and providing greater fairness for all Americans by closing special interest tax breaks and loopholes.
This unified framework serves as a template for the tax-writing committees that will develop legislation through a transparent and inclusive committee process. The committees will also develop additional reforms to improve the efficiency and effectiveness of tax laws and to effectuate the goals of the framework. The Chairmen welcome and encourage bipartisan support and participation in the process.
TAX RELIEF AND SIMPLIFICATION FOR AMERICAN FAMILIES
Over the last decade too many hard-working Americans have struggled to find good-paying jobs, make ends meet, provide for their families and plan for their retirement. They are the focus of this framework. Strengthening and growing the middle class, and keeping more money in their pockets, is how we build
a stronger America. By lowering the tax burden on the middle class, and creating a healthier economy, we can give American families greater confidence and help them get ahead. At the same time, taxpayers deserve a system that is simpler and fairer. America’s tax code should be working for, not against, middle- class families.
“ZERO TAX BRACKET”
Under the framework, typical middle-class families will see less of their income subject to federal income tax.
The framework simplifies the tax code and provides tax relief by roughly doubling the standard deduction to:
-$24,000 for married taxpayers filing jointly, and
-$12,000 for single filers.
To simplify the tax rules, the additional standard deduction and personal exemptions for the taxpayer and spouse are consolidated into this larger standard deduction. This change is fundamental to a simpler, fairer system.
In combination, these changes simplify tax filing and effectively create a larger “zero tax bracket” by eliminating taxes on the first $24,000 of income earned by a married couple and $12,000 earned by a single individual.
interesting. all i hear on the news/radio are Republican politicians saying ‘we are doubling the standard deduction!’
ok, yes that’s true, but what they are not making clear is that they are also wrapping in the personal exemption, which means this really isn’t as beneficial as it’s being touted to be.
here’s a simple example on the next page:
Married couple has employment income of 100K. No children. Not homeowners.
Under current law for 2017:
(12.7K) Less Standard Deduction
(4.05K) Less 2017 Personal Exemption Spouse1
(4.05K) Less 2017 Personal Exemption Spouse2
79,200 = Taxable Income
15,539 Tax based on current 2017 tax rates
Under proposed law for 2017:
(24K) Proposed Standard Deduction
76,000 = Taxable Income
14,739 Tax based on current 2017 tax rates (Note they didn’t release details on their proposed tax brackets so this is all we have to go by for now)
= 800 Tax savings under proposed plan.
I’d love to run the same example for a married couple with 2 kids…but I can’t. below they discuss how they are going to increase the child tax credit but provide no details on what that will be or how it will be calculated…so To Be Determined.
If you own a home and pay state income income taxes, note that you would no longer be able to deduct property taxes paid and state income taxes paid as itemized deductions under this plan. This might be made up by the increased child tax credit discussed below, but if you don’t have or plan to have children…your taxes could increase. Impossible to know though w/out more details.
INDIVIDUAL TAX RATE STRUCTURE
Under current law, taxable income is subject to seven tax brackets. The framework aims to consolidate the current seven tax brackets into three brackets of 12%, 25% and 35%.
i’m a fan of decreasing the number of tax brackets. allows people to better understand how their taxes are calculated. but…we really don’t know how this affects taxpayers without knowing what income amounts are taxed at each bracket.
Typical families in the existing 10% bracket are expected to be better off under the framework due to the larger standard deduction, larger child tax credit and additional tax relief that will be included during the committee process.
An 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 and does not shift the tax burden from high-income to lower- and middle-income taxpayers.
The framework also envisions the use of a more accurate measure of inflation for purposes of indexing the tax brackets and other tax parameters.
ENHANCED CHILD TAX CREDIT AND MIDDLE CLASS TAX RELIEF
To further simplify tax filing and provide tax relief for middle-income families, the framework repeals the personal exemptions for dependents and significantly increases the Child Tax Credit. The first $1,000 of the credit will be refundable as under current law.
increases by how much?? how to calculate?? Details please…
In addition, the framework will increase the income levels at which the Child Tax Credit begins to phase out. The modified income limits will make the credit available to more middle-income families and eliminate the marriage penalty in the existing credit.
The framework also provides a non-refundable credit of $500 for non-child dependents to help defray the cost of caring for other dependents.
Finally, the committees will work on additional measures to meaningfully reduce the tax burden on the middle-class.
INDIVIDUAL ALTERNATIVE MINIMUM TAX (AMT)
The nonpartisan Joint Committee on Taxation (JCT) and the Internal Revenue Service (IRS) Taxpayer Advocate have both recommended repealing the AMT because it no longer serves its intended purpose and creates significant complexity. This framework substantially simplifies the tax code by repealing the existing individual AMT, which requires taxpayers to do their taxes twice.
like this! this tax was originally enacted into law in 1969 when congress learned there were about 155 taxpayers with income of 200K or more for the 1966 tax year who had paid no federal taxes. So really it was put in place to make sure the top .00001% paid some tax. but of course government got greedy and changed things over the years so that now this tax affects over 5M taxpayers…and it’s confusing for taxpayers to understand!
In order to simplify the tax code, the framework eliminates most itemized deductions, but retains tax incentives for home mortgage interest and charitable contributions. These tax benefits help accomplish important goals that strengthen civil society, as opposed to dependence on government: homeownership and charitable giving. i like the idea of getting rid of most of the itemized deductions. i’ve seen this really create confusion for taxpayers.
in my opinion i don’t know why mortgage interest should be deductible, but it’s a popular deduction and the real estate lobby is likely too strong and well funded to nix this one. i’m not sure if this deduction really encourages home ownership or is just another factor in the home ownership process that increases the price of homes.
getting rid of the deduction for charitable contributions would not look good for any government (rep or democrat) and it does encourage giving. i wonder if there will still be caps/limits on how much is deductible based on income?
WORK, EDUCATION AND RETIREMENT
The framework retains tax benefits that encourage work, higher education and retirement security. The committees are encouraged to simplify these benefits to improve their efficiency and effectiveness. Tax reform will aim to maintain or raise retirement plan participation of workers and the resources available for retirement.
OTHER PROVISIONS AFFECTING INDIVIDUALS
Numerous other exemptions, deductions and credits for individuals riddle the tax code. The framework envisions the repeal of many of these provisions to make the system simpler and fairer for all families and individuals, and allow for lower tax rates.
some details would be nice here…
DEATH AND GENERATION-SKIPPING TRANSFER TAXES
The framework repeals the death tax and the generation-skipping transfer tax.
i haven’t decided yet what i think about this. from a tax prep only perspective it sure makes life easier on people who are affected by it…they can stop paying high fees for advice and structures to work around it.
COMPETITIVENESS AND GROWTH FOR ALL JOB CREATORS
Small businesses drive our economy and our communities, and they deserve a significant tax cut. This framework creates a new tax structure for small businesses so they can better compete. Furthermore, America’s outdated tax code has fallen behind the rest of the world – costing U.S. workers both jobs and higher wages. In response, the framework puts America’s corporate tax rate below the average of other industrialized countries and promotes greater investment in American manufacturing.
TAX RATE STRUCTURE FOR SMALL BUSINESSES
The framework limits the maximum tax rate applied to the business income of small and family- owned businesses conducted as sole proprietorships, partnerships and S corporations to 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.
wow…this is huge. businesses like these are ‘pass through entities’ so the entity does not pay the tax…rather it is passed through and then taxed on the owners personal tax return. So if your personal tax bracket is already 25% or under will you now have to pay this 25% rate? …if so this would only benefit business owners that are over the 25% rate. clarification would be great here.
we can’t put a number to this right now b/c they have not issued any proposed tax brackets yet…again…more details needed!
TAX RATE STRUCTURE FOR CORPORATIONS
The framework reduces the corporate tax rate to 20% – which is below the 22.5% average of the industrialized world. In addition, it aims to eliminate the corporate AMT, as recommended by the non-partisan JCT. The committees also may consider methods to reduce the double taxation of corporate earnings.
“EXPENSING” OF CAPITAL INVESTMENTS
The framework allows businesses to immediately write off (or “expense”) the cost of new investments in depreciable assets other than structures made after September 27, 2017, for at least five years. This policy represents an unprecedented level of expensing with respect to the duration and scope of eligible assets. The committees may continue to work to enhance unprecedented expensing for business investments, especially to provide relief for small businesses.
this encourages business to buy equipment/materials for their business, which could stimulate the economy.
The deduction for net interest expense incurred by C corporations will be partially limited. The committees will consider the appropriate treatment of interest paid by non-corporate taxpayers.
a wise colleague of mine who is an investment adviser commented on this…”The removal of the interest deduction is huge for corporate America…. Debt levels are the highest they have ever been because of rates… if that interest is no longer deductible that theoretically increases the cost of capital of debt financing…”. Important to think about in terms of deciding whether (and how much) to invest in a company with lots of debt.
OTHER BUSINESS DEDUCTIONS AND CREDITS
Because of the framework’s substantial rate reduction for all businesses, the current-law domestic production (“section 199”) deduction will no longer be necessary. Domestic manufacturers will see the lowest marginal rates in almost 80 years. In addition, numerous other special exclusions and deductions will be repealed or restricted.
The framework explicitly preserves business credits in two areas where tax incentives have proven to be effective in promoting policy goals important in the American economy: research and development (R&D) and low-income housing. While the framework envisions repeal of other business credits, the committees may decide to retain some other business credits to the extent budgetary limitations allow.
the skeptic in me interprets this last part as…”to the extent lobbying/special interest groups are able to make their case and convince us otherwise.” 🙂
TAX RULES AFFECTING SPECIFIC INDUSTRIES
Special tax regimes exist to govern the tax treatment of certain industries and sectors. The framework will modernize these rules to ensure that the tax code better reflects economic reality and that such rules provide little opportunity for tax avoidance.
THE AMERICAN MODEL FOR GLOBAL COMPETITIVENESS
The framework puts America on a level international playing field and puts an end to the incentives for shipping jobs overseas.
TERRITORIAL TAXATION OF GLOBAL AMERICAN COMPANIES
The framework transforms our existing “offshoring” model to an American model. It ends the perverse incentive to keep foreign profits offshore by exempting them when they are repatriated to the United States. It will replace the existing, outdated worldwide tax system with a 100% exemption for dividends from foreign subsidiaries (in which the U.S. parent owns at least a 10% stake).
To transition to this new system, the framework treats foreign earnings that have accumulated overseas under the old system as repatriated. Accumulated foreign earnings held in illiquid assets will be subject to a lower tax rate than foreign earnings held in cash or cash equivalents. Payment of the tax liability will be spread out over several years.
STOPPING CORPORATIONS FROM SHIPPING JOBS AND CAPITAL OVERSEAS
To prevent companies from shifting profits to tax havens, the framework includes rules to protect the U.S. tax base by taxing at a reduced rate and on a global basis the foreign profits of U.S. multinational corporations. The committees will incorporate rules to level the playing field between U.S.-headquartered parent companies and foreign-headquartered parent companies.
Repeated from above…If the Republicans want taxpayers on board they need to release more details so that we can actually run some tax returns under the proposed reform and help the public make an informed decision. Tax preparers are the best people to help the American people understand a tax reform plan since we can actually calculate the numbers! I just hope the Republicans give us the chance to do so.
I’ll keep posting as details emerge.