The proposal for tax reform is out, but unfortunately it is light on details. Having reviewed the proposal, we have a few thoughts:
- The process for Reconciliation (basically passing the law) is extremely complex and based on the proposal outline almost impossible to pass under its current form without Democratic support. Tony Nitti at Forbes has an excellent analysis on this. You can read it here.
- It is too soon to say exactly who the winners and losers will be, but we'll take a stab.
- The really high income earners (1%'ers) should experience quite a windfall since they are seeing their top rate go down from 39.6% to 35%. Even with losing some deductions someone making $1 million + should see a massive tax cut
- Those on the fairly low end of the income scale could see a cut since the standard deduction is going to double, meaning more people may be in the 0% bracket
- Those families with lots of dependents could be worse off since personal exemptions (basically a deduction per person in the household) are removed
- Individuals in high tax states could be worse off since state taxes are no longer deductible (think NY, CA, NJ, MD, etc) in this proposal (mortgage interest and charitable contributions remain as itemized deductions)
- Small business owners with high incomes in pass through entities (S-Corps, LLC, Partnerships, etc) could see a gigantic tax cut. This is pretty much all small businesses. The highest proposed pass through rate will drop from 39.6% to 25%. There are no significant details on this but previous comments made state that this may not apply to service companies (which make up about 85% of the US economy). If this passes, another huge win could be tax planners, attorneys and consultants working out how to exploit this loophole.
- Families with large estates could be big winners- the proposal eliminates the estate tax
- There is no mention to many things that will impact our clients- at what income do the rates start? what is happening to the tax on capital gains and dividends? Are the Obamacare taxes going to be kept intact?
At this point it is just to early to tell. The numbers don't add up so there will have to be significant changes to this proposal. Also, whenever you change the code you create winners and losers. The losers usually have lobbyist that will come out in full force (real estate industry, Wall Street, etc). Once they realize they could be on the losing end, expect some backlash. There is a reason we haven't seen major tax reform since 1986. It is a hard process due to the literally hundreds of competing interests involved. It should be interesting to see how this plays out…
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