Tax: what Trump is proposing
President Donald Trump finally announced the massive changes that he wants to make to the Internal Revenue Code. The announcement was in the format of a “framework” for discussion in that the Senate and House of Representatives both have tax bills that differ from each other and also differ from what “Tea Party” Republicans want. “Tax reform” negotiations will not start in earnest until after the Budget is passed in late October or early November.
The “framework”, as released, follows:
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 paycheques.
Third, make America the jobs magnet of the world by levelling 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.
The goals of tax reform include tax relief for middle-class families.
The simplicity of “postcard” tax filing for the vast majority of Americans. 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 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.
“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.
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 per cent, 25 per cent and 35 per cent. Typical families in the existing 10 per cent 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. 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
The non-partisan Joint Committee on Taxation and the Internal Revenue Service 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.
In order to simplify the tax code, the framework eliminates most itemised 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: home ownership and charitable giving.
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.
Six 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.
Death and generation-skipping transfer taxes
The framework repeals the death tax and the generation-skipping transfer tax.
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 per cent exemption for dividends from foreign subsidiaries (in which the US parent owns at least a 10 per cent 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.
There are no “surprises” in the “framework” as these items have been discussed for over a year and were standard “talking points” during the campaign. The Republican Party is likely to fracture to pass this bill by themselves and will likely need bipartisan assistance.
A major disappointment for expatriates could be the above talking point. There had been significant conversation about “not taxing” the profits that American companies earn outside the US and groups such as American Citizens Abroad actively campaigned for such an exclusion to also be applied to income earned by US citizens living and working abroad.
Pursuant to the requirements relating to practice before the Internal Revenue Service, any tax advice in this communication is not intended to be used, and cannot be used, for the purpose of (I) avoiding penalties imposed under the United States Internal Revenue Code, or (ii) promoting, marketing or recommending to another person any tax related manner.
The tax advice given by this column is, by necessity, general in nature. You should, of course, check with your own US tax consultant as to how specific transactions affect you since tax advice varies with individual circumstances.
James Paul Sabo, CPA, is the president of ETS Ltd, PO Box HM 1574, Hamilton HM GX, Bermuda. Questions should be sent to: email@example.com
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