Yesterday, the Trump administration and congressional Republicans released their latest tax reform proposal, grandly titled a “Unified Framework for Fixing Our Broken Tax Code.” I’m not sure anyone doubts that the code is broken, but for various reasons I’m doubtful that this will be the solution. Still, your prospects and clients will have questions, and it will pay for you to learn enough about the proposal to discuss it intelligently. So, like it or not, here we are.
The plan itself is a fairly straightforward collection of changes, all of which have been suggested before, and many of which might gather bipartisan support in a less toxic, polarized Congress. On the individual side, it cuts brackets from seven to three (12-25-35%), doubles the standard deduction, eliminates the personal exemption, increases the Child Tax Credit by an unspecified amount,eliminates itemized deductions other than mortgage interest and charitable gifts, and repeals the Alternative Minimum Tax.
Conceptually, there’s nothing new there, although of course the devil is in the details. Where do those three tax brackets start and end? The answer to that question tells us who’ll cheer louder, the House Freedom Caucus or Bernie Sanders fans. (While we’re on the topic, reporters who think that moving from seven brackets to three brackets means “tax simplification” are totally missing the point. Don’t they know the real action is defining what income winds up in that “taxable” column in the first place?)
The proposal also eliminates the estate tax and generation-skipping tax entirely. Presumably, this also includes the gift tax, although yesterday’s release doesn’t go into that much detail.
Finally, on the business side, the plan cuts the top corporate rate to 20%, cuts the top rate on pass-through income, cuts the top rate on income from S corps, partnerships, and proprietorships to 25%, limits deductions for net business interest paid by taxable corporations, allows immediate expensing for non-real estate capital assets, eliminates the domestic production activity deduction, imposes a repatriation tax to bring back accumulated profits of foreign subsidiaries, and moves to a “territorial system” (taxing companies on U.S. earnings only) to level the playing field for American companies.
The business changes are likely to be more controversial than the individual changes, especially the lower top rate on pass-through income. Why should a hardworking small business owner pay less tax than an equally hardworking salaried doctor, lawyer, or Indian chief?
Here’s the real issue: is any of this actually going to pass? Pushing a square peg into a round hole is difficult enough, although doable if you have a big enough mallet. Pushing $4 trillion worth of tax cuts into a $1.5 trillion budget opportunity is likely to prove far harder – especially in today’s Congress.
I’ve said for years that the folks on Capitol Hill have trouble passing legislation to name a post office. (I’ve said it so often, in fact, that Keith, who edits these Briefs, has said “nope, need a new analogy.”) But remaking the entire tax code on a scale that hasn’t been done since President Ronald Reagan and House Speaker Tip O’Neill could sit down for cocktails together at the end of a long day? Color me skeptical.
We can also expect some fierce criticisms of the plan’s merits. Trump and the Republicans pinky-swear that the wealthy won’t be getting a break under the plan. But that’s patently ridiculous on its face. It’s going to be hard to defend repealing the estate tax, which applies only to the 0.02% of estates worth over $5.49 million, as anything but a giveaway to the rich. And raising the bottom bracket from 10% to 12% is going to look terrible, even if we as tax professionals understand that the proposed higher rate applies to a smaller base of income.
Those of you who got tired of watching the bickering over Obamacare repeal aren’t going to be any happier with the debate over tax reform. And now we have to wait to see what Jimmy Kimmel says, too!
What does all this mean for us? Well, prospects and clients will have questions, and you’ll need answers. Unfortunately, in many case, those answers will be variations on “don’t know yet,” “your guess is as good as mine,” and “beats the hell out of me.”
In many cases, the best answer is simply this:
“Look, we’re still waiting on the details for questions like where the new tax brackets start and end, and how much higher the Child Tax Credit will go. But we’re keeping an eagle eye on the debate so we can tell you as soon as possible what the plan looks like for you. If it means paying more, we’ll be ready to pivot to new strategies to minimize those changes. And if it means paying less, we’ll be ready to help you take maximum advantage of the new law.”
One thing we can all be sure of is this: whatever Congress ends up voting on (if they manage to reach a vote at all) will look quite different from what got rolled out yesterday.
Of course, we already have a marketing piece that you can use to outline the new proposal for your clients. (What, would we drag our feet on something like this?) You’ll find the “Trump Tax Proposal September 2017” in the “Marketing Templates” section of TaxCoach, all the way at the bottom under “Other Resources.” (It was actually up yesterday, just a few short hours after the framework itself appeared.) It’s a Microsoft Word doc, so feel free to customize it all you like. Just be sure you’re ready for those conversations with prospects and clients. And keep your eyes peeled here for further updates as the debate changes.