President Trump and his “Big Six” tax team have recently announced the basic framework of the tax plan that they plan to present to Congress sometime in the near future. Although many changes are expected as negotiations progress, the main talking points of the proposed tax relief measure appear to have been set. These include, among other things, providing tax relief for middle income earners, making the tax environment more favorable for business and simplification of the tax code.
The following are some of the major changes that are expected to be included in the Republican tax proposal:
Increase in the Standard Deduction
The plan will suggest increasing the amount of the standard deduction from the current $6350 ($12,700 for married couples) to $12,000 ($24,000 for married couples). This increase will widen the “zero” tax bracket by effectively doubling the amount of income that is exempt from taxation.
Reduction in Number of Tax Brackets
The Republican tax proposal suggests reducing the number of tax brackets from seven to three with the new brackets set at 12%, 25% and 35%. Income ranges for the new brackets are of key importance but are yet to be determined.
Elimination of Most Itemized Deductions
The new tax plan will eliminate most tax deductions other than those for mortgage interest and charitable contributions. Under the new tax proposal, taxpayers will no longer be able to take a tax deduction for local and state income taxes, medical expenses or real estate taxes, among other things.
Increase in the Child Tax Credit
Although the new credit amount and income phase-out limits have been not been announced, Trump’s tax team has said that their tax proposal will include a significant increase in the child care tax credit which is currently set at $1000. The plan will also include a $500 tax credit for dependents who are not children.
Elimination of the Federal Estate Tax
The proposal calls for the elimination of the federal estate tax which is currently imposed on estates valued at more than $5.49 million.
Introduction of Set Tax Rate for Pass-through Business Entities
The new tax plan would provide for the taxation of pass-through entities such as partnerships, S-corporations and sole proprietorships at a rate of 25% rather than at the individual income tax rates of the company owners. Since this is lower than the top personal income tax rate, the provision would be paired with measures aimed at preventing the characterization of personal income as business income.
Reduction of the Corporate Income Tax Rate
Under the new tax relief plan, the corporate income tax rate would be reduced to 20% from the current rate of 38.91%. Coupled with the new lower tax rate, corporations would lose many of their current tax credits.
Elimination of Repatriation Taxes
The Republican tax proposal suggests eliminating the current tax on repatriation of foreign funds and replacing it with a onetime repatriation tax. The one time repatriation tax would be at a much lower rate than the current repatriation tax rate. Under the proposed tax plan, United States companies would only pay taxes on profits earned inside the county.
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