By now you have probably heard or read about the GOP’s proposed framework — their effort to re-write tax legislation and implement some of the most significant tax reform in decades.
While the proposed framework lays out many specific strategies, there are four main goals of the framework:
|1.||Simplify the tax code|
|2.||Increase wages for American workers|
|4.||Bring offshore profits back onshore|
So what are the major changes to expect and how do you plan for them?
The framework proposes changing the current seven-bracket structure to a three-bracket system of 12%, 25%, and 35%. While we don’t know yet what income ranges these brackets cover, we expect a decrease for most individual taxpayers, specifically those currently in the top bracket.
Businesses can expect a lower rate: a proposed corporate rate of 20% and a maximum 25% tax rate on pass-through business income taxed at the individual level.
In addition to an overall reduction in tax rates, the framework proposes repeal of the Alternative Minimum Tax (AMT) to reduce taxes for some individuals and corporations and simplify tax planning and compliance.
Tax Planning Tip:
Individuals and businesses should start thinking about the timing of potential transactions:
|•||Defer income and/or accelerate deductions to defer tax to 2018 (lower rates).|
|•||Businesses using the cash method of accounting for tax can delay sending customer invoices, pushing some AR collections into next year and catch up on AP to accelerate the deductions. Depending on tax accounting methods used, stocking up on supplies, prepaying insurances and other expenses may accelerate tax deductions.|
|•||To accelerate deductions, consider profit sharing contributions or employee bonuses.|
|•||Make use of the installment sale rules to defer income to next year.|
Changes for Individual Filers — Exemptions, Deductions & Credits
The framework proposes several changes to simplify tax filings and provide tax relief for middle-income families:
|•||The standard deduction will almost double|
|•||No more personal exemptions|
|•||Increased and expanded child tax credit|
|•||Elimination of most itemized deductions (home mortgage interest and charitable giving deductions remain)|
|•||Improved incentives that encourage work, higher education and retirement savings|
Tax Planning Tips:
|•||The elimination of itemized deductions extends to the deduction for state income taxes paid. Taxpayers living in states that impose a tax currently allowed as a federal itemized deduction should consider prepaying their current year state taxes to take advantage of the deduction.|
|•||Taking an itemized deduction for property taxes may no longer be allowed in 2018, so taxpayers may wish to prepay these expenses in 2017.|
|•||Charitable giving also provides an opportunity to accelerate deductions in 2017.|
Changes for Businesses
In addition to changes in imposed tax rates, the framework proposes immediate expensing for the cost of new investments in depreciable assets, excluding buildings, for at least five years. The Section 179 deduction and related limitations will no longer be applicable.
While the framework doesn’t state which business deductions and credits will be eliminated, we do anticipate changes.
Tax Planning Tip:
Changes to expensing depreciable assets provides an opportunity to consider the timing of capital expenditures especially for those businesses with asset additions close to or exceeding the current Section 179 expense limitations. Keep in mind the current and expected future tax rates to determine which tax year will optimize your tax savings. As we learn more details, businesses will need to pay close attention to which deductions and credits will be limited and be ready to act.
The fourth goal of the framework is to end incentives for keeping foreign profits offshore. A combination of lower tax rates and the ability to spread the payment of taxes over several years will aid in this effort, as will rules that prevent companies from shifting profits offshore.
The GOP’s proposed framework leaves significant room for additional provisions as lawmakers begin drafting tax reform. There is significant work to be done to turn this proposed framework into real tax reform. As 2017 comes to a close, it is unlikely that taxpayers will see any of these provisions effective this year, but tax planning for 2017 and beyond in the midst of significant tax reform will be critical to optimize your tax savings.
If the GOP succeeds, the existing one-million-word-plus tax code should become simpler, paving the future for individuals and businesses to make decisions without the burden of uncertainty. If you are unsure what your next steps should be, please contact your BerryDunn tax advisor.