Updates on the Proposed Tax Reform Framework
Some of the President Donald Trump’s proposed tax reform frameworks for individuals and businesses that would constitute the most sweeping changes to the federal tax code in decades are:
Reduction in Corporate tax rate:
The framework would lower the maximum corporate tax rate from 35 percent to 20 percent. This would bring the current 35 percent statutory federal rate down significantly.
Reduction in Individual tax rate:
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%. The plan is designed to have the lowest tax rate at 12% and the highest individual rate at 35%
Possibility of a fourth, higher bracket:
The framework also specifies that Congress may plan to add a fourth tax bracket above 35 percent, for the purpose of ensuring the new tax code is “at least as progressive as the current system and doesn’t shift the burden from higher-income to lower-income households.”
Tax Rate for Pass-through businesses:
Reduce the tax on S corporations, partnerships and sole proprietorship's to 25%. The framework limits the maximum tax rate applied to the business income of small and family owned businesses (conducted as sole proprietorship's, partnerships and S corporations) to 25%
Doubling of standard deduction:
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
Elimination of personal exemptions:
The exemption allows taxpayers to subtract $4,050 from income for each person claimed on the tax return. The framework repeals the personal exemptions for dependents.
Elimination of itemized deduction:
The framework eliminates most itemized deductions, but retains tax incentives for home mortgage interest and charitable contributions.
Elimination of Individual Alternative Minimum Tax (AMT):
This framework substantially simplifies the tax code by repealing the existing individual AMT, which requires taxpayers to do their taxes twice.
Elimination of the estate tax:
In 2017, this tax only applied to inherited assets totaling $5.49 million or more. Very few households pay the estate tax. The most progressive component of the federal tax code, only paid by extremely rich estates, may also be abolished.
Elimination of the state and local tax (SALT) deduction:
The SALT deduction allows people to deduct what they pay in state and local taxes from their federal tax bill. In states with high-income tax rates, like California, New Jersey and New York this deduction can be quite substantive. Around one-third of the benefits from people using the SALT deduction come from these states.
Child tax credit and Credit for non- child dependents:
The child tax credit, currently $1,000, will grow to an unspecified higher level. The first $1,000 of the credit will be refundable as under current law. In addition, the framework will increase the income levels at which the Child Tax Credit begins to phase out.
The framework also provides a non-refundable credit of $500 for non-child dependents to help pay the cost of caring for other dependents.