A First Glimpse of Trump's Proposed Changes to the Tax Code

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On September 27, 2017, the Trump Administration, the House Committee on Ways and Means, and the Senate Committee on Finance released a long-awaited tax reform proposal, titled the Unified Framework for Fixing Our Broken Tax Code (the “United Framework”). Most notably, the United Framework proposes to completely repeal the estate and generation-skipping transfer tax while also lowering the income tax rates for businesses and individuals.
 
At the individual level, the United Framework proposes to:

• Reduce the number of tax brackets from seven to three, with rates of 12%, 25%, and 35%. However, the proposal does not specify where the brackets would start or end;
• Almost double the current standard deduction of $12,000 for individuals and $24,000 for married couples;
• Repeal personal exemptions for dependents, but in order to offset the repeal, increase the child tax credit to an unspecified amount;
• Give a $500 credit to anyone caring for a family members who isn’t a minor, regardless of age;
• Repeal the individual alternative minimum tax;
• Eliminate most itemized deductions, but retain the existing tax incentives for home mortgage interest and charitable contributions;
• Repeal the estate and generation-skipping transfer taxes (however there is no mention of changes to the existing gift tax); and
• Eliminate the deduction for state and local taxes.

 
For U.S. businesses, the United Framework proposes to:

• Lower the corporate tax rate from 35% to 20%;
• Eliminate the corporate alternative minimum tax;
• Limit the maximum tax rate for pass-through businesses—such as partnerships, certain LLCs, and S-Corps—to 25% instead of the individual tax rates that currently apply;
• Limit the deduction for net interest expense incurred by C corporations;
• Give special tax treatment to certain unspecified industries and sections (without providing specifics);
• Exempt the repatriation of foreign profits and replacing the current worldwide tax system with a complete exemption for dividends from foreign subsidiaries; and
• Tax foreign profits of U.S. multinational corporations at a reduced rate and on a global basis.

 
To be sure, the proposals in the Framework are broad and in many cases, short on specifics. Ostensibly, this was done on intentionally to allow Congress the opportunity to work out the details.
 
Critics of the Unified Framework contend that the proposed changes benefit the wealthy to the detriment of lower-income taxpayers. In particular, they point to the fact that the proposed repeal of the estate tax and generation skipping transfer-tax benefits only the top 1% of Americans, while the proposed increase in the lowest income tax bracket from 10% to 12% negatively impacts the country’s poor. Another common criticism of the Unified Framework is that it is more or less silent on how to pay for all of the proposed tax cuts.
 
It remains to be seen how the proposals in the Unified Framework will be adopted by Congress. If enacted, the lower tax rates for businesses may create incentives for individuals to create new business entities to take advantage of the proposed tax cuts for businesses.
 
For now, Nabhan Law will continue to monitor the developments coming out of Washington closely.