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01/05/2017

Will 2017 Be the Year for Comprehensive Tax Reform? (article)


2017 could be big for tax reform.The 2016 election has lasting ramifications for politics, but it also created a unique pathway to tax legislation. Republican President-elect Donald Trump took control of the White House with Republicans retaining control of the House (236 seats to the Democrats’ 191) and the Senate (53-47) could mean more coordination between the executive branch and the legislative branch than in recent years.

Tax reform is a priority for both President-elect Trump and Congress. It is possible that an overhaul of the tax code could be coming in the first 100 days of the Trump administration. Whether this is accomplished through a bipartisan bill or the budget reconciliation process remains to be seen. Whatever the outcome, it will likely be a mix of the tax plan President-elect Trump supported during his campaign and the House Republicans’ Tax Reform Blueprint.

Businesses and individuals alike should take note of the proposed tax reform changes supported by President-elect Trump and House Republicans. Though there are some differences between the plans, many similarities exist, which may indicate the direction comprehensive tax reform could take.

Options for Tax Reform in 2017

Tax Plan Comparison

Issue

House Republicans’ Tax Plan (2016)

President-elect Trump’s Tax Plan

Individual Tax

Establish three tax brackets with rates of 12%, 25%, and 33%. The top rate applies to taxable income over $190,150 ($231,450 for joint filers). Consolidate the standard deduction and the personal exemption into a larger standard deduction of $12,000 ($24,000 for joint filers). Add an additional deduction of $6,000 for single taxpayers with at least one child.

Single and earn less than $15,000, or married and jointly earn less than $30,000, no income tax. All others fall into three brackets: 12% - up to $75,000 (joint); 25% - $75,000 - $225,000 (joint); and 33% - over $225,000 (joint). Single amount for all brackets is half of joint. No marriage penalty provision. Tax carried interest as ordinary income.

Itemized Deductions

Eliminate all itemized deductions except the mortgage interest deduction and the charitable contributions deduction.

Cap itemized deductions at $100,000 individual/ $200,000 joint. Increase standard deduction to $15,000 individual/ $30,000 joint. Eliminate personal exemptions.

Credits

Increase the child tax credit to $1,500, the first $1,000 of which is refundable. Raise the phase-out threshold for the child tax credit for married households from $110,000 to $150,000.

Alternative Minimum Tax (AMT)

Eliminate the AMT.

Repeal.

Rates on Capital Gains and Dividends

Tax capital gains, dividends, and interest as ordinary income, with a 50% exclusion. This is equivalent to taxing investment income at half the marginal rates of ordinary income (6%, 12.5%, and 16.5%).

Maintain maximum rate of 20% for highest bracket.

Corporate Income Tax Rate

Lower the corporate tax rate to 20%.

Top rate of 15%. Eliminate most deductions and credits except R&D. Manufacturers may expense capital investment but lose interest deduction (election revocable within 3 years, then permanent).

Pass-Through Business

Lower the top rate on pass-through businesses to 25%.

Originally said no business income taxed at a rate higher than 15%. Now, no proposed changes. Going forward, the 15% rate only applies to businesses that are taxed as corporations.

Capital Expenses

Move to full expensing of capital investment. Preserve the last-in, first-out method of accounting.

Maintain maximum rate of 20% for highest bracket.

International Income

Shift to a territorial tax system. Enact a deemed repatriation of foreign income at a tax rate of 8.75% for cash and cash-equivalent profits and 3.5% on other profits. Make the federal income tax border-adjustable, exempting businesses from paying taxes on exports but denying them a deduction for cost of imported goods.

A one-time deemed repatriation of corporate cash held overseas at 10% tax rate. End the deferral of taxes on corporate income earned abroad.

Estate Tax

Eliminate the estate tax.

Repeal, but capital gains held until death will be subject to tax (first $10 million tax free). Contributions of appreciated assets into a private charity established by the decedent or the decedent’s relatives will be disallowed.

Republicans in the House of Representatives favored eliminating several business credits and deductions, including the domestic production activities deduction (DPAD). House Republican plans also included eliminating the deductibility of net interest.

President-elect Trump has supported repealing the net investment income tax as well as repealing and replacing the Affordable Care Act.

He also supported childcare tax changes for both businesses and individuals. An incentive for businesses to create onsite childcare would involve a $500,000 tax credit limited to a five-year recapture window. Direct employee subsidies for the childcare would be taxed to the employee rather than the business, and the subsidies would not be eligible for tax credits. An above-the-line deduction for childcare would be created for individuals, covering up to four children and capped at the state average for childcare costs. The exclusion would be available to stay-at-home parents and grandparents. Spending rebates would be available through the earned income tax credit.

For healthcare, President-elect Trump supported creating dependent care savings accounts (DCSAs). The DCSAs would be available for specific individuals, including unborn children. The total amount of contributions to DCSAs would be limited to $2,000 per year. Any leftover funds for children could be used for education expenses when the child turns 18. The government will provide a 50 percent match on parental contributions with a maximum match of $1,000 per year.

Other 2017 Tax Planning Considerations

Individuals and businesses should continue to monitor developments related to the new partnership audit guidelines as well as the changes to family valuation discounts. Other elements of 2017 tax planning are more certain. The IRS and the Social Security Administration recently released inflation-adjusted figures for 2017, which are used to determine the thresholds for several tax provisions and individual income tax brackets.

The following are some of the key inflation adjustments for 2017:

Individual Income Tax Maximum 39.6% Rate Bracket

Single

Married Filing Jointly

Head of Household

Married Filing Separately

>$418,400

>$470,700

>$445,550

>$235,250

3% Limitation on Itemized Deductions

>$261,500

>$313,800

>$287,650

>$156,900


The maximum estate and trust tax 39.6 percent rate bracket includes any estate with taxable income over $12,500. For a detailed list of 2017 inflation adjustments, see Tax Rates and Inflation Adjusted Figures Released for 2017.

For More Information

We will be monitoring the developments that affect your tax planning as they occur. For more information about how the changes being discussed could affect your business’s tax strategy or your estate, please contact us.


Copyright © 2017, CBIZ, Inc. All rights reserved. Contents of this publication may not be reproduced without the express written consent of CBIZ. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ).

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