Written on behalf of Feigenbaum Consulting
Several weeks ago, we blogged about the Trump Administration’s proposed tax framework, affecting both personal and corporate taxes. The plan is intended to both simplify and lower tax rates, particularly for corporations, however, it looks like the proposal is shaping up to be an increasingly tough sell, with Republican party factions at odds with one another.
Currently, the biggest hurdle is shaping up to be the ability to pay for everything and making the proposals feasible. President Trump has repeatedly emphasized that the tax proposals are intended to assist middle class families rather than wealthy taxpayers; however, if legislation is amended to spend more on middle-class tax cuts many existing provisions for higher-income earners and corporations could become hard to sustain.
State and Local Tax Deductions
Ending state and local tax deductions could be a crucial source of revenue that could allow for lowering of federal tax rates. Experts predict that eliminating these deductions could add more than $1 trillion in revenue over the next ten years.
However, such an elimination may also become a major political liability. Currently, state and local tax deductions allow taxpayers to deduct the amount they pay to their municipality and the state from their federal taxes.
This has become an issue of debate, with some complaining that the current deductions artificially encourage municipalities and states to increase their taxes due to the offset of costs to residents. Others argue that the deduction would primarily benefit those with higher incomes. In order to take the state and local tax deduction, taxpayers must itemize their deductions, which is generally only done by those with higher incomes. At the same time, changes could also affect those in the upper middle class, with individuals in high-tax states such as New York and California being disproportionately affected.
The state of the deductions is currently in flux, but it seems likely that at least some version of them will remain.
In addition to state and local deductions, the proposed framework could also affect the standard deduction, effectively doubling it to $12,000 per individual. At the same time, it would eliminate a $4,050 personal exemption for each member of a household. As such, taxpayers with two or more children would have more of their income taxed under the new plan, at a higher rate of 12% (as opposed to the current rate of 10%).
To address this issue, the proposed framework provides for a larger child tax credit, but does not offer many details on it. Some Republican leaders are calling for an expanded child tax credit, urging leaders to make the credit at least $2,000 and fully refundable against payroll taxes.
This again raises the specter of being able to pay for everything. An increase in the refundable child tax credit would apply to millions of families, making even this relatively small increase an expensive reality.
Criticisms from Conservatives
The proposals in their current form have already come under fire from fiscal conservatives who are concerned that the plan does not go far enough. Conservative think tanks have argued that while the plan allows companies to immediately deduct new investments, this can be done for a period of only five years, rather than permanently.
Predicted problems include the encouragement of an immediate surge in investments over the next five years as businesses increase their spending to take advantage of the deduction, followed by a period of scale back when the deduction period.
We will continue to follow developments with respect to the tax proposals, and will blog updates as they become available. In the meantime, if you have questions about personal or corporate tax planning, contact Feigenbaum Law. We offer customized tax and financial planning solutions to clients in the U.S., Canada, and around the globe. Contact us online or at (905) 695-1269 or toll free at (877) 275-4792.to learn about how we can help with your complex, cross-border tax planning.