The proposed tax framework repeals the estate and generation-skipping transfer tax, but does not mention a possible replacement for the lost revenue (for potential options, see our paper “Tax Planning in the Face of Political Uncertainty"). It also does not mention the gift tax or the rules relating to the step-up of cost basis for inherited assets. With so much left unsaid, devising a tax-minded wealth-transfer strategy with any certainty will be challenging.
Eliminating the state and local tax deduction, which allows taxpayers who itemize their deductions to write off property taxes, state and local income taxes, and sales taxes, would have a significant impact on residents of higher-tax states, such as New York, New Jersey and California. However, the administration has signaled a willingness to negotiate on this point, and Republican lawmakers from the states most affected are likely to object.
Under the new framework, the standard deduction would rise from $6,350 for single filers and $12,700 for joint filers to $12,000 and $24,000, respectively. It's thought that this increase could lead to significantly fewer taxpayers itemizing deductions on their tax returns, causing fewer taxpayers to receive tax benefits from mortgage interest payments and charitable contributions. This could have a big impact on the real estate market and related industries, as well as on charitable organizations.
Previous proposals had assumed that the 3.8% surtax on net investment income and the 0.9% Medicare tax would have already been undone through health care legislation. This new proposed tax framework makes no mention of eliminating them. These taxes primarily affect single filers who make more than $200,000 and joint filers who make more than $250,000.
1 "Big 6 Tax Framework Could Cost $2.2 Trillion," Committee for a Responsible Federal Budget, September 27, 2017.
2 The proposal leaves open the possibility of a fourth bracket on the highest-income taxpayers.
3 The initial Republican House proposal called for investment income to be taxed as ordinary income with families and individuals able to deduct 50% of their net capital gains, dividends, and interest income, leading to basic rates of 6%, 12.5%, and 17.5% on such investment income depending on the individual's tax bracket.
4 Personal Exemption eliminated.
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