Investment Insights

Much Ado About Taxes

The White House and the South LawnThe Trump Administration today released its “Unified Framework for Fixing our Broken Tax Code” to flush out its tax reform priorities for individuals and businesses.  The nine-page document is similar to the single-page bulleted outline the Administration rolled out in April and which we commented on then.  Frankly, not much has changed in five months as the details of what will ultimately be a bill debated and voted on by Congress remain elusive.

For high income taxpayers, the Administration is recommending a reduction in the highest marginal tax rate to 35% from 39.6%, however, the framework leaves open the possibility that Congress may add “an additional top rate…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.”  Repeal of the Alternative Minimum Tax and the elimination of the estate tax remain constants since the Presidential campaign.  In the vein of simplifying the tax code, the Administration is recommending the elimination of many itemized deductions (expenditures including state and local taxes, real estate taxes, medical costs, and investment fees, among others) while maintaining benefits for home mortgage interest and charitable contributions.  The debate over the fate of the state and local tax deduction will be interesting theatre for political junkies as members on both sides of the Congressional aisle who represent high tax states may band together to protect their constituents on this single issue.

On the business side, the Administration’s framework reduces the corporate rate from 35% to 20%, while the rate for income that passes through from S Corporations and partnership entities (including limited liability companies) from a maximum of 39.6% to 25%.  In anticipation of accountants, attorneys, and, yes, wealth planners, strategizing on ways to take advantage of a new business structure, the framework “contemplates that the committees will adopt measures to prevent the recharacterization of personal income into business income to prevent wealthy individuals from avoiding the top personal tax rate.”

As an indication that there is not much new news in today’s framework release, the final paragraph from our blog post in April is still relevant today and so we repeat it here.  Congress and the Trump Administration have a lot of work ahead to come up with a tax bill that can ultimately be passed and signed into law.  The devil will be in the proverbial details with regard to sorting out the winners and losers of any changes.  It’s a process that will take months and could very likely extend in to 2018.  And left unanswered (today) was the financing of such a tax cut and whether an increase in economic growth and activity will be able to offset the revenue lost by a reduction of rates and repeal of other provisions.  We’ll let the economists and budget analysts sharpen their pencils on that one.  If anything, today’s announcement was the Administration reiterating its position that taxes on corporations and individuals are too high and they intend to do…something…about it.

Learn more about Adam Ochlis, CPA, MST, Partner & Senior Client Advisor.

 

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