Experts are predicting that the new Republican tax proposal, titled the “Unified Framework for Fixing Our Broken Tax Code," would result in $5.8 trillion in tax cuts over the next decade and include about $3.6 trillion in revenue-raising provisions.1 It proposes some drastic changes to current tax law, including reducing the number of individual tax brackets from seven to three (or possibly four), and lowering the corporate income tax rate from 35% to 20%.

Republicans will likely seek to use the budget reconciliation process, which would allow them to pass a bill with only 51 votes. Per the reconciliation rules, the final bill must not add to the deficit beyond the 10-year budget window, or must be scheduled to expire before the end of that window (though it can be made permanent later, as the 2001 and 2003 tax cuts were in 2012). However, in order to do this, the House and Senate must first pass a budget resolution that includes language permitting them to use the reconciliation process.

While it will likely take months for Congress to negotiate over and write a final bill, the framework laid out in this proposal gives us a sense of what to expect. As currently written, the proposal would:

1

Repeal Estate and Generation-Skipping Transfer Taxes

The proposed tax framework repeals the estate and generation-skipping transfer tax, but does not mention a possible replacement for the lost revenue (for potential options, see our paper “Tax Planning in the Face of Political Uncertainty"). It also does not mention the gift tax or the rules relating to the step-up of cost basis for inherited assets. With so much left unsaid, devising a tax-minded wealth-transfer strategy with any certainty will be challenging.

2

Eliminate Deduction for State and Local Taxes

Eliminating the state and local tax deduction, which allows taxpayers who itemize their deductions to write off property taxes, state and local income taxes, and sales taxes, would have a significant impact on residents of higher-tax states, such as New York, New Jersey and California. However, the administration has signaled a willingness to negotiate on this point, and Republican lawmakers from the states most affected are likely to object.

3

Roughly Double the Standard Deduction

Under the new framework, the standard deduction would rise from $6,350 for single filers and $12,700 for joint filers to $12,000 and $24,000, respectively. It's thought that this increase could lead to significantly fewer taxpayers itemizing deductions on their tax returns, causing fewer taxpayers to receive tax benefits from mortgage interest payments and charitable contributions. This could have a big impact on the real estate market and related industries, as well as on charitable organizations.

4

Allow the Net Investment Income and Medicare Taxes to Remain, For Now

Previous proposals had assumed that the 3.8% surtax on net investment income and the 0.9% Medicare tax would have already been undone through health care legislation. This new proposed tax framework makes no mention of eliminating them. These taxes primarily affect single filers who make more than $200,000 and joint filers who make more than $250,000.

Current Tax Law vs. the "United Framework" Proposal

Look for Near-Term Opportunities, Maintain a Long-Term Vision
Consult Your Tax Advisor on Deductions and Income Deferral

Given the possibility of lower tax rates and fewer deductions in 2018, you may want to consult your tax advisor and discuss the merits of deferring income until next year or claiming available tax deductions this year. That said, it's possible that the proposed changes could be made retroactive for 2017, if they are enacted.

Build Flexibility Into Your Wealth Plans

While we now have a clearer picture of what Republicans intend, there's no telling what might actually become law — and no guarantee that what becomes law won't be changed again in the future. Work with your trusted advisor to develop a flexible plan that takes different outcomes into account and allows you to feel confident that you're on the right track no matter what comes out of Washington.

Don't Stop Planning

There's more to your long-term wealth plan than just taxes, including the need to manage and protect assets, to plan for disability or incapacity, or to develop business succession strategies. Take a step back and ensure that your primary tax-planning and wealth-transfer goals are clearly articulated and make sure your long-term goals remain the driving force behind any decisions you make.

  • Footnotes

    1 "Big 6 Tax Framework Could Cost $2.2 Trillion," Committee for a Responsible Federal Budget, September 27, 2017.

    The proposal leaves open the possibility of a fourth bracket on the highest-income taxpayers.

    3 The initial Republican House proposal called for investment income to be taxed as ordinary income with families and individuals able to deduct 50% of their net capital gains, dividends, and interest income, leading to basic rates of 6%, 12.5%, and 17.5% on such investment income depending on the individual's tax bracket.

    4 Personal Exemption eliminated.

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