An Extraordinary Opportunity to Reform the Tax Code
by Richard S. Bernstein on Oct 27, 2017
By: Richard S. Bernstein, CEO & Daniel J. Glassman, LL.M
On September 27, 2017, the Trump Administration, House Ways and Means Committee, and Senate Finance Committee released their unified framework for tax reform legislation. The unified framework left a number of open issues such as the dividing lines for the different tax brackets and whether there will be a higher tax rate for the wealthiest taxpayers. As the Congressional Committees begin crafting legislation based on the unified framework, the prospects for successful tax reform based on the unified framework will be greater if the legislation has the aspects described below.
- Tax Bracket Dividing Lines. The division between the 12%, 25%, and 35% tax brackets in the unified framework should be established so that no taxpayer faces a higher marginal tax rate than under current law. This would require having (i) the 12% bracket extend through at least the current cutoff for the 15% bracket; (ii) the 25% bracket extend through what is currently the 33% bracket; and (iii) making sure that the 35% bracket does not begin until the income level at which the 35% currently begins.
- Simplifying Taxation of Investment Income. Instead of having multiple different tax rates for certain types of investment income, the legislation should adopt a single structure for investment income that is based on a percentage exclusion predicated on the particular tax bracket that a taxpayer is in. Taxpayers in the 12% bracket would receive a 100% exclusion for investment income; taxpayers in the 25% bracket would receive a 75% exclusion for investment income; and taxpayers in the 35% bracket would receive a 50% exclusion for investment income. Investment income would include interest, dividends, and capital gains. Taxpayers would be allowed investment interest and other investment expenses as deductions only against investment income.
- Change Obamacare 3.8% Net Investment Income Tax. The legislation should repeal the Obamacare 3.8% tax on net investment income. To the extent the Congressional Committees need additional revenue and desire to have a tax rate higher than 35% for the wealthiest taxpayers, the 3.8% Obamacare tax could be converted into a surtax on taxable income in excess of $1 million. Such a change would still ensure all taxpayers have lower marginal rates than under current law.
- Leave Current Estate, Gift, and Generation-skipping Transfer Tax Structure Unchanged. The unified framework included a full repeal of the estate and generation-skipping transfer taxes (but did not mention the gift tax or income tax basis of inherited property). Maintaining the current estate, gift, and GST tax structure and the full basis step-up at death will benefit far more taxpayers than full repeal with a carryover basis regime. It is far better to get the lowest possible income tax rates for corporations, pass-through businesses, and individuals, than using revenue and political capital to repeal the estate and GST taxes that impact so few families and can be adequately planned for and funded with life insurance and other planning structures.
The unified framework represents an extraordinary opportunity to reform our broken tax code in a way that lowers tax rates for all taxpayers and allows the U.S. economy to grow again. Consult your legal, tax and insurance advisors to explore planning opportunities that are appropriate for your family.
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Daniel J. Glassman is a shareholder at the Gunster law firm and advises clients in all areas of personal and business tax planning. He works with individuals and businesses to create the most tax efficient structure for his clients in order to achieve the desired outcome.