written on behalf of Feigenbaum Law
On September 27, a group of top Trump Administration officials, in conjunction with key leaders from the House Ways and Means Committee and the Senate Finance Committee, released a 9-page framework outlining proposed changes to the U.S. tax code.
The new guidelines are similar to an earlier 1-page plan released by the administration in April of this year and are consistent with the key themes and concepts outlined in a policy paper released last year. The guidelines are intended to be a non-binding template for tax committees in Congress to be able to develop tax legislation.
Key Elements of the Guidelines
There are key changes proposed by the guidelines affecting both personal and corporate tax.
- Reduction of the federal corporate tax rate to 20%
The guidelines propose to cut the corporate tax rate from 35% to 20%, eliminating many deductions and credits (except for the low income housing credit and the research and development credit), and also eliminating the corporate alternative minimum tax.
The average corporate tax rate in the industrial world is 22.5%, making a U.S. rate of 20% highly attractive for foreign companies.
- Reduced tax rates for pass-through entities
The guidelines propose the introduction of a 25% tax rate on income earned through “pass-through entities” (i.e. partnerships, S corporations, etc.). This is intended to be applied in lieu of the individual tax rate applicable to the owners of those businesses. Currently, these entities do not pay tax at the entity level. Rather, the income flows through to, and is taxed, to the owners. The guidelines direct the designated Congressional Committee to distinguish wages versus business profits in order to prevent individuals from being able to avoid the top personal tax rate.
- Limits on deductions for net interest expense by C corporations
The guidelines propose to limit deductions for net interest expense incurred by C corporations. Such deductions are often used to offset, quite significantly, any corporate income of foreign investors that is subject to U.S. tax. Limiting these deductions on net interest could potentially result in an increase in corporate income subject to tax and might offset the advantages of the proposed lower corporate tax rate.
- Lower personal tax rates
The guidelines seek to cut the number of individual income tax brackets from seven to three (consisting of 12%, 25%, and 35% brackets). If the Congressional Committee determined that the three brackets shifted the tax burden too much from higher income to lower income tax payers, they would have the authority to include an additional rate for the highest-earners.
- Elimination of itemized deductions
The guidelines seek to eliminate most itemized deductions, including the deduction for local and state taxes paid. The charitable giving and mortgage interest deductions would remain.
- Elimination of federal estate tax
The guidelines seek to repeal both the federal estate and the generation-skipping transfer taxes. Currently, the federal estate tax applies to individual estates with a value of more than $5.49 million or to married couples with a combined estate worth more than $10.98 million. The generation-skipping transfer tax currently applies to transfers during life or upon death that, as the name implies, skip a generation.
- Elimination of the Alternative Minimum Tax
The guidelines seek to eliminate the Alternative Minimum Tax, a separate tax system intended to prevent high-income tax payers from reducing their income via deductions.
At Feigenbaum Law we offer custom solutions to personal and corporate tax planning. Our in-depth knowledge of U.S. and Canadian tax makes us leaders in our field. We offer services to clients in the U.S., Canada, and around the globe. Contact us online or at (416) 777-8433 or toll free at (877) 275-4792 to learn about how we can help with your complex, cross-border tax planning.