President Donald Trump revealed the Republican Party’s “United Framework for Fixing Our Broken Tax Code” at the Indiana State Fairgrounds on Sept. 27. The plan is a nine-page reform blueprint that will be used as a template for tax-writing committees to develop legislation.
The proposed framework explains what the GOP is trying to achieve, but it isn’t the easiest for everyday Americans to follow. What does this all mean? And how will it happen? Here is a breakdown of plan provisions that have been released so far:
FEWER TAX BRACKETS
In an effort to simplify our tax structure, the framework proposes a consolidation of the current seven tax brackets into three brackets. Taxpayers are currently taxed at one of seven income-based rates ranging from 10 percent to 39.6 percent. The plan would create three tax brackets — 12 percent, 25 percent and 35 percent.
The Alternative Minimum Tax (AMT), which was designed to keep high-income families from receiving too many tax benefits, would be eliminated. AMT calculations require the taxpayer to add back certain credits and deductions.
STANDARD DEDUCTION UP, PERSONAL EXEMPTION OUT
The standard deduction reduces a taxpayer’s taxable income by a standard dollar amount based on a taxpayer’s filing status. For the 2016 tax year, the standard deduction was $6,350 for a single taxpayer, plus the taxpayer received a personal exemption of $4,050, which also reduces taxable income. Together, the standard deduction and personal exemption for a single taxpayer created a filing threshold of $10,400, which is the amount an employee may earn before being taxed on income and required to file a tax return. Under the proposed plan, the personal exemption would be repealed and the standard deduction would be increased to $12,000 for single taxpayers.
Most taxpayers have a general choice between itemizing qualified expenses or taking the standard deduction, choosing the deduction that offers them the most tax relief. In the tax reform framework, most itemized deductions would be repealed.
A tax credit works to reduce the taxpayer’s tax liability. The Unified Framework offers enhancements to the Child Tax Credit, increasing the income limits for the current credit and repealing exemptions for dependency. The reform would increase income limits for this credit, expanding eligibility to support more middle-class families. The plan boasts of a “significant increase” to the credit but does not yet provide much detail. The credit would also be expanded to provide a credit of $500 for those who are caring for qualified dependents that are not the taxpayer’s qualifying child.
The Estate Tax is placed on estates, large inheritances and cumulative gifts in excess of $5.45 million and is taxed at 40 percent. The Generation-Transfer Tax is a tax that may apply when an inheritance or trust skips one or two generations.
CUT CORPORATE TAX RATE
The reform blueprint describes plans to regain the competitive edge, stabilize American businesses and increase job opportunities. To achieve this, corporate tax rates would be cut to 20 percent from 35 percent.
There are many unanswered questions and various opinions surrounding the plan. The “United Framework for Fixing Our Broken Tax Code” does not demonstrate all of the characteristics of a tax reform — a tax reform changes the way we are taxed but generally should not increase the country’s deficit, but the proposed plan offers huge tax cuts and no explanation as to how the country would replace that money.
As the framework stands today, the country’s annual deficit of over $550 billion and total debt of over $20 trillion would ultimately be increased by trillions of dollars. The GOP would like to sign the reform into law before the end of the year, but Congress still has a long way to go in ironing out all the details.
For more information on press releases, issued statements or to view the Unified Framework for Fixing Our Broken Tax Code document, visit whitehouse.org.