The House GOP released an outline of its eagerly anticipated tax plan Thursday morning. The talking points offer a good overview of what the House GOP considers important and where they may break from President Trump’s previously announced plan.
Here are some of the highlights.
Three Income Tax Brackets for Most Americans, with One Caveat. Similar to the President’s plan, this proposal would create three main income tax brackets (there are currently seven) at 12 percent, 25 percent and 35 percent. However, it breaks from the President by acknowledging the need to maintain a fourth bracket for the highest earners, so it would leave the current top 39.6 percent bracket in place as well.
Repeal the Alternative Minimum Tax. This has long been an unpopular tax. For most Americans it’s a frustrating bookkeeping inconvenience, but for the wealthiest sect it’s a major thorn in their sides. It disallows many common big ticket deductions among the richest Americans and those with complicated businesses, such as incentive stock options and depletion and accelerated depreciation on certain leased personal or real property. For instance, this tax alone cost President Trump some $31 million on his 2005 return (suffice it to say, he isn’t a fan).
Corporate Tax Rate Lowered to 20 Percent. This is a big one and is in lockstep with the President’s plan. The current rate is 35 percent, so this would be "the largest reduction in the U.S. corporate tax rate in our nation’s history,” according to the talking points.
Cap Taxes on Pass-Through Income at 25 Percent. This is basically identical to the proposal in Trump’s plan. However, what’s most relevant for advisors is the potential for clients to recharacterize portions of their income as pass-through and take advantage of this potentially lower tax rate as well. The House GOP plan proposes numerous changes to help close the loopholes currently available, but time will tell how successful that effort will be.
Increase the Standard Deduction and Eliminate Many Special Interest Deductions. As part of a further effort to simplify things so that Americans can “file their taxes on a form as simple as a postcard,” the standard deduction will increase from $6,350 to $12,000 for individuals and $12,700 to $24,000 for married couples. In exchange, many deductions will be eliminated.
But the Charitable Deduction Stays. When the President proposed eliminating deductions in his plan, one of the main concerns among advisors was what impact repealing the charitable deduction would have on philanthropy nationwide. The House looks to share that concern and specifically calls out the charitable deduction as one that will remain.
Provide Immediate Relief from the Death Tax by Doubling the Exemption and Repealing the Death Tax After Six Years. President Trump’s plan called for a simple repeal of the estate tax, but offered very few details. The House GOP plan calls for the doubling of exemptions and sets a six-year sunset period for full repeal of the estate and generation-skipping transfer taxes. The current exemption is already sky high at roughly $5.5 million ($11 million for couples), so doubling that figure would act as an effective repeal, hitting only the largest (or most poorly planned) estates. That said, it wouldn’t be fully repealed for six years, during which a great deal, including at least one presidential election, can happen. Additionally, it appears that the gift tax will remain technically intact, albeit subject to the now $11 million ($22 million for couples) exemption, which should render it largely toothless.
In the talking points, Congress uses the term “death tax,” although there is no “death tax.” What we’re talking about here is the estate tax. Proponents of repeal have long used the term “death tax” interchangeably with estate tax because it drives home the negative connotations they see with it. (The proper terms are used in the bill itself.)
Overhaul the U.S. International Tax System. What we can infer from the bill points to a system similar to that in the President’s plan that would not tax income that businesses earn in other countries and would encourage the return of assets by allowing a one-time tax holiday on past income earned overseas. The enormity of this particular task ensures that there will be many more developments to come, and readers should expect a more in-depth look at this section from our authors shortly.
Carried What Now? Conspicuous missing from both the President’s plan and the House GOP’s plan is any mention of carried interest, which is currently taxed at a mere 15 percent and largely benefits private equity funds. Increasing this tax to show how tough he would be on Wall Street was a major talking point during Trump’s campaign. It seems to have fallen by the wayside.
Though it breaks from Trump’s plan in a few key areas, ultimately, the House GOP’s plan looks a lot like the President’s, with a few producer’s notes. So, although things will inevitably change in the coming months, we should have a good idea of what the bill Republicans eventually put forward will look like.