In a sweeping U.S. tax cut plan unveiled Thursday that would add US$1.5 trillion to the nation’s debt, Republicans revealed they plan to preserve the popular retirement account for middle-class Americans, while limiting a cherished deduction for homeowners.
GOP leaders briefed rank-and-file lawmakers on the proposal Thursday morning ahead of a formal rollout and a show of unity event at the White House with President Donald Trump. A major revamp of the tax code — the first in three decades — is a top legislative and political priority of Republicans.
Of potential interest to your cross-border clients, the plan calls for immediately doubling the exemption on taxation of large estates to US$22.4 million from US$11.2 million, and repealing the estate tax entirely after six years.
Details were contained in a summary obtained by The Associated Press.
The proposal would leave intact the existing rules on 401(k) retirement accounts and the ability of Americans to contribute up to US$18,000 into the accounts tax-free.
But the plan limits the widely used deduction for mortgage interest for newly purchased homes at up to US$500,000, a sharp reduction from the current US$1 million cap.
The plan also limits the deductibility of local property taxes to US$10,000 while eliminating the deduction for state income taxes, which generated significant opposition from Republicans in high-tax states such as New York and New Jersey.
“I view the elimination of the deduction as a geographic redistribution of wealth, picking winners and losers,” said Rep. Lee Zeldin, R-N.Y., who represents eastern Long Island. “I don’t want my home state to be a loser, and that really shouldn’t come as any surprise.”
The child tax credit would be increased from US$1,000 to US$1,600, though the US$4,050 per child exemption would be repealed.
The legislation is a longstanding goal for Capitol Hill Republicans who see a once-in-a-generation opportunity to clean up an inefficient, loophole-cluttered tax code. But there is lingering opposition from northeastern Republicans fearful of losing a cherished deduction for state and local taxes and anxiety among other rank-and-file lawmakers over emerging details.
Influential conservative Rep. Mark Meadows, R-N.C., dismissed proposed retirement changes as a “non-starter,” adding “that’s what most of middle-income America uses as their nest egg.”
The plan shrinks the number of tax brackets from seven to three or four, with respective tax rates of 12%, 25%, 35% and a category still to be determined. The tax system would be simplified, and most people would be able to file their returns on a postcard-sized form.
The plan calls for nearly doubling the standard deduction used by most average Americans to US$12,000 for individuals and US$24,000 for families, and increasing the per-child tax credit. On net, it could mean tax increases for many upper middle-income families.
The plan slashes the corporate tax rate from 35% to 20%, a demand of Trump. It also repeals the inheritance taxes on multimillion-dollar estates, a big break for the wealthy.
Republicans and Trump argue that sharply cutting tax rates for businesses improves U.S. economic competitiveness, but the possibility of letting the lower corporate rates expire is rankling some longtime advocates who say the uncertainty could limit its boost to the economy.
The ambitious timetable calls for passing the complex measure in the House by Thanksgiving.
“Failure is not an option,” said Rep. Chris Collins, R-N.Y.
The emerging plan would retain the Clinton-era 39.6% income tax rate for the wealthiest earners. But for that highest bracket, the tax writers were considering raising the minimum level of income to US$1 million for couples or families from the current US$470,000 — a change that would reduce tax revenue.
Meadows, the chairman of the House Freedom Caucus, said he was worried about eligibility limits that could prevent some businesses from taking advantage of a lower 25% tax rate.
“How as a Republican can we pick winners and losers that way? I mean it makes absolutely, certifiably no sense,” Meadows said.
Trump set an aggressive timetable for the legislation and predicted a grand signing ceremony before Christmas at “the biggest tax event in the history of our country.”
Democrats have repeatedly complained the plan was too favourable to business and the wealthy, and contradicted Trump’s rhetoric of bringing tax relief and economic benefit to the stressed middle class.
Highlights of the tax plan:
Income tax rates: Would sets four income tax rates of 12%, 25%, 35% and 39.6%. The 25% rate would start at US$90,000 for married couples, with a 35% rate beginning to bite at US$260,000 — which means many upper-income families whose top rate is 33% would face higher taxes. Individuals making US$500,000 and couple earning US$1 million would face the current Clinton-era top rate of 39.6%.
Deductions: Would nearly double the standard deduction to US$12,000 for individuals and US$24,000 for couples, which means significantly fewer taxpayers would itemize deductions like mortgage interest. Would limit the mortgage interest deduction for new mortgages to loans the first US$500,000 of the loan, instead of the present $1 million limit. Would eliminate the deduction for state income taxes and caps the deduction for property taxes at US$10,000. But personal exemptions of US$4,050 for each family member would be eliminated.
Tax credits: Would increase the per-child tax credit from 1,000 to US$1,600 and extends it to families earning up to US$230,000. There’s also a new US$300 tax credit for each adult in a family.
Business taxes: Would cut the top corporate tax rate from 35% to 20%. Would lower the rate for many “pass-through” businesses currently taxed at individual rates to 25%, though service businesses such as law firms would not be eligible.
Multinational corporations: Would establish a 10% tax on profits by overseas subsidiaries of U.S. corporations and seeks to prevent tax gamesmanship that has moved U.S. companies overseas. Would permit “repatriation” of profits stockpiled overseas at a one-time lower rate. Would tighten tax rules on U.S. operations of foreign companies.
AMT: Would repeal the alternative minimum tax, a parallel tax structure aimed at ensuring that all people pay at least some tax. It has been criticized for excessive complexity.
Estate tax: Would immediately double the exemption on taxation of large estates from US$11.2 million to US$22.4 million and repeal the estate tax entirely after six years.