Once again, we have a big news release about the release of a tax reform proposal, and once again, we’re left disappointed. What’s the old saying? “Fool me once …” anyway.
So the Unified Framework for Fixing Our Broken Tax Code (or UFFOBTX for short) was released on Wednesday. If you’ve been following along, you’ll know we’ve been frustrated by a lack of detailed information. Today was no different. The only upside is that we now know that what we’ve been hearing all along is remaining consistent, and wasn’t blown up in the past two months – simplification and lowering of rates.
Here’s what we’ve got:
- Two filing statuses – Single and Married
- Three rate brackets – 12%, 25%, and 35%
- Increased standard deduction – $12,000 for Single, $24,000 for Married Filing Joint
- AMT – Gone
- Itemized Deductions – largely gone – save the mortgage interest deduction and charitable contributions
- Increased Child Credit and potential for it to be refundable
- Non-refundable $500 credit for non-child dependents
- Estate tax – Gone
- Generation-skipping Transfer tax – Gone
This all sounds great – it really does. However, while it definitely will simplify things, whether your taxes will go up or down varies wildly depending on your situation. The single biggest thing that we’ll need to take into account is the loss of the personal exemption. While the increase in the standard deduction was meant to make up for that, a middle-income married couple with two kids and a house most likely loses in this scenario barring a dramatic increase in the Child Credit (which we have no details on yet). If you’re a single parent, under current law, you’re able to deduct from taxable income $17,400 between the standard deduction and personal exemptions – that will now decrease to $12,000.
The other big piece we’re missing are the income brackets. We have the rate brackets, but without knowing at what income levels those rates kick in, it’s impossible to get truly accurate results. Suffice it to say though that, I’ve run a bunch of scenarios, and the loss of the personal exemptions is really cutting into the tax savings – and is more than eliminating them in many cases.
I do also have a concern about unintended consequences here when it comes to charitable organizations. Say before you had itemized deductions of $40,000 – $10,000 in state and local income taxes – $10,000 in real estate taxes – $10,000 in mortgage interest – and $10,000 in charitable contributions. If you’re married, you’ll be getting a standard deduction of $24,000 under the reform plan – and all other things being equal, you won’t itemize any longer since state and local income taxes and real estate taxes are no longer eligible as itemized deductions. We’ve now removed the tax incentive for you to continue making charitable contributions at the rate that you were previously.
If you’ve really been paying attention, you’ll notice that this section is now titled “Business Taxes”, not “Corporate Taxes”. That can only mean one thing – we’ve finally got some traction on a rate adjustment for flow-through and Schedule C income.
Here are the highlights:
- Tax rate for sole proprietorships (Schedule C), Partnerships, and S Corporations – 25%
- Tax rate for C Corporations – 20%
- Bonus Depreciation – 100% for at least five years (personal property only)
- Limitation on deductibility of interest expense for C Corporations
- Domestic Production Activities Deduction (Section 199) – Gone
- Research and Development and Low Income Housing Credit – only credits left standing
- AMT – Gone
The first thing that jumps out at me is the rate difference between C Corps and other businesses. I’m not sure as to the thinking behind this – other than the fact that they couldn’t leave it as is and drop the C Corporation rate to 20%. My guess is the number crunchers told them that they couldn’t afford a 20% rate on all business income.
Second thing (and I can’t believe I’m typing this) is the resurgence of Bonus Depreciation. Granted, the use of the term Bonus Depreciation is mine – not theirs – but they’re essentially just proposing an extension and increase to the Bonus Depreciation that we already have – as opposed to a permanent law allowing the complete expensing of fixed assets in year 1. Also playing into my use of the term is the applicability to only personal property.
The biggest takeaway from the business side of tax reform is the continued emphasis on accelerating deductions, and deferring income. For every dollar of expense you can accelerate or dollar of revenue you can defer, you will realize a PERMANENT tax savings of as much as 15%.
Theme here is incentives to bring foreign cash back to the US, and stop outsourcing jobs. Unfortunately, very few details were included.
So that’s where we’re at. In October of 2016, we thought there was no possibility of tax reform. By the end of November 2016, we assumed it would be a foregone conclusion. After the fall of healthcare reform, we thought tax reform was dead again. But, here we are. We’ll see if Congress can get it done.
As always – if you have any questions or would just like to chat about taxes. Feel free to give us a call or send us an email.