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Congressional Republicans Propose Sweeping Tax Reform

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The following outlines the tax framework proposed by Congressional leaders. It remains to be seen to what extent the proposals survive.

INDIVIDUAL TAX

  • The proposal replaces the current seventiered system with three rates of 12%, 25% and 35%, but what taxable income level these rates apply to has not been specified.
  • The framework eliminates most itemized deductions except for mortgage interest and charitable contribution deductions. The impact on residents of the highest-taxed states is considerable and is poised to be the subject of intense negotiations on Capitol Hill.
  • Tax benefits for retirement accounts purport to remain the same.
  • It is unclear whether the tax-writing committees will maintain the Affordable Care Act taxes (3.8% and 0.9% Medicare tax) at their current thresholds.

BUSINESS TAX

  • The framework proposes to decrease the corporate tax rate from 35% to 20% and also eliminates the corporate alternative minimum tax (AMT). It further calls for a 25% tax rate for sole proprietorships and pass-through entities. Reasonable compensation rules are anticipated with respect to pass-through entities.
  • Repatriation: trillions of dollars in corporate profits are currently parked offshore. The proposal contemplates a one-time repatriation of those profits over time but without specifying tax rates.

ESTATE TAX

  • The proposal abolishes the federal estate tax for individual estates. There is no specific proposal about possible changes to the gift tax exemption indicating that it remains in effect.

Unrelated to the Congressional Tax Proposal, certain changes will come into effect starting January 1, 2018.

ESTATE TAX EXEMPTION

  • Starting in January, the federal estate tax exemption is projected to be $5.6M for individuals and $11.2M for couples.[1]

ANNUAL EXCLUSION INCREASES

  • Starting in January, the annual gift tax exclusion amount is projected to increase to $15,000 for individuals, $30,000 for couples. This marks the first increase to the annual exclusion since 2013.

For more information on the topic discussed, contact Yolanda Kanes at kanes@thsh.com.

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[1] The 5.6M dollar exemption is projected as it is based upon annual inflationary adjustment. As a result, the final effective amount of the exemption may vary slightly.



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