A lot has been written and said about the current efforts in Congress to pass “tax reform”. We have and will continue to discuss the proposals and their impact with our clients in planning meetings, etc. To date we have chosen to remain silent in light of the many income tax proposals and continuing changes to those proposals. We are still uncertain as to what will be in the final bill, but this is a good time to provide some explanation of where we are.
Overview
The House of Representatives passed its version of the bill on November 16, 2017. The Senate Finance Committee passed its version the same day. The full Senate returned to work this week and must now address the bill. If the Senate passes its version of the legislation, the “conference committee” must reconcile the two versions. Both the House and Senate then have to vote on the final legislation. They hope to get all this done this month, which is being very optimistic. In 1986, the last time the tax code was reformed, the legislative process took over two years.
“Tax reform” is difficult. It typically has two goals, which are (1) simplify the tax code and (2) reduce tax rates. Everyone agrees the tax code is far too complex. Most people would also approve of lower tax rates, at least for middle-income families. It sounds simple, but in Washington DC it is said that “tax simplification is complicated stuff”. The challenge is lowering the rates, but not reducing too much the revenue the government receives in taxes. Also, the Senate has an arcane process called “reconciliation”, which if followed permits the Senate to pass tax legislation with a simple majority.
Today Congress is hamstrung by partisan politics and the unwillingness to compromise. Under “reconciliation” the Senate can pass tax legislation with a simple 51-vote majority, as long the government does not lose more than $1.5 trillion of revenue over the next 10 years. If the legislation loses more revenue, passage would require a 60-vote majority to defeat a filibuster.
Corporate Tax
The signature piece of both tax bills is the reduction of the corporate income tax from 35% to 20%. This alone would reduce revenue by $1.5 trillion over the next 10 years. Every dollar of additional tax cuts, say for individuals, must therefore be offset with an additional dollar of tax revenue. All tax deductions and exemptions, including the most entrenched and popular, are candidates for repeal. Each deduction and exemption benefits a particular group or economic sector. Groups affected will naturally push back, making passage of comprehensive “tax reform” a political challenge. The appearance is that Congress is randomly selecting deductions and exemptions to cut back or repeal, just so they can meet their revenue goals. That is not “tax reform”.
Individual Tax
Every individual would be impacted by the proposed changes. The overall tax rates would be marginally lower, but many deductions and credits would be scaled back or eliminated. As examples, the deduction for medical expenses and state and local taxes are eliminated in one or both bills. The deduction for home mortgage interest is scaled back. The alternative minimum tax (“AMT”) would be repealed. The overall rates are lower, but the loss of certain deductions and credits would result in decreases in taxes for some and increases for others. Whether one would be a winner or loser will depend upon his or her particular tax situation. However, it is clear that a large portion of the tax benefits would go to the very wealthy.
Estate Tax
The estate tax is impacted differently by the House and Senate bills. A married couple would be able to pass up to $22.4 million to following generations with no tax, meaning the tax would apply only to the very wealthy. The House bill eliminates the estate tax entirely beginning in 2024.
Planning for Change
Whether the legislation is passed this month or in 2018, it is likely to be effective January 1, 2018. That means planning opportunities exist now. There are potential savings in state and local taxes, which should be reviewed and considered. That is just one of many areas which should be reviewed. Taking actions this year or waiting until 2018 could yield significant tax benefits. We are tracking the bills closely and will continue to do so until passage.
We will continue to meet with our clients to go over these changes and discuss planning opportunities available in light of the proposed changes.
Please click the PDF link below for a detailed summary of the Proposed Tax Reform Legislation.
If you have any questions about how the proposed changes may impact your situation, please contact us.