Last week, Republican leaders in the House, Senate and Trump administration announced their “unified framework” for overhauling the U.S. tax code. This framework – the most specific proposal released to date since President Trump took office – acts as a starting point for legislative negotiations that will shape tax policy in the coming months. While many details remain unknown, the proposal includes:
- reducing the number of tax brackets from seven to three (12%, 25% and 35%)
- lowering the top marginal income tax rate from 39.6% to 35%
- lowering the top tax rate for partnerships, sole proprietorships and S corporations from 39.6% to 25%
- lowering the corporate tax rate from 35% to 20%
- eliminating the estate tax and the generation-skipping transfer tax
- eliminating most itemized deductions, excluding the mortgage interest and charitable contribution deductions, while doubling the standard deduction to $12,000 for single filers and $24,000 for married couples
- repealing the alternative minimum tax
Notably absent from the proposal is a specific reference to the elimination of any state and local income taxes or any changes to capital gain taxes (currently an effective rate of 23.8% for long-term gains).
It is important to note that the framework is a broad outline and is a starting point for negotiations in the House and Senate. Because the Republicans plan to invoke a procedural rule known as budget reconciliation, only a simple majority in both houses will be necessary to pass any ultimate proposals into law. When this procedure is invoked, proposed legislation cannot increase the deficit beyond the budget window of 10 years, meaning that any tax cuts will have to be offset some place else, unless those laws expire prior to the 10-year mark, similar to the Bush tax cuts in the early 2000s.
The broad proposals listed in the unified framework lack many specifics that will need to be negotiated in congressional committees. Those negotiations, which include many political and budgetary hurdles, will almost certainly affect the ultimate outcome of the tax laws. Moreover, there are fewer than 30 days where both the House and Senate are in session before December 8, when they must revisit funding the government. Prior to that, the House and Senate must work on the daunting task of agreeing on a budget for fiscal year 2018 – a process that could take weeks or longer, and one that must be completed prior to any drafting of legislation or committee hearings on such legislation. Republicans hope to have the legislation passed by year-end, though negotiations of the details could certainly delay passage into 2018, which, because of the 2018 congressional elections, could be detrimental to the success of any reform package. We should know more in the coming weeks and will continue to monitor the news from Capitol Hill. If you have any questions or concerns about how tax reform might affect you or your family, please do not hesitate to reach out to your relationship manager or wealth planner.
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