Back in April, the White House unveiled its highly anticipated tax plan which, as expected, proposed steep tax cuts across the board. At the end of September, the Trump Administration, in conjunction with the House Ways and Means Committee and the Senate Finance Committee, released a tax reform framework that included many of the same cuts. On November 2nd, the House released a detailed tax reform bill, titled “Tax Cuts and Jobs Act.” Below are comparisons of the initial April proposal, the framework from September and the current House Bill (click on image to enlarge).
The more notable parts of the House bill are the business income tax rate reduction, the elimination of itemized deductions and the eventual repeal of the estate tax. Notice that the business income tax rate proposals crept up since April. Even so, the 25% rate on income from flow-through entities would still represent a substantial reduction from the top personal income tax rate of 39.6% that currently applies to many members of business partnerships. Such a reduction could open the floodgates to business restructuring in order to reap the benefit of tax savings.
In addition, the House Bill provides more clarity on the proposed treatment of the gift tax and the basis step-up that is currently available at death. The gift tax is applied to transfers during life, and is currently unified with the estate tax, which applies to transfers at death. The maximum amount that an individual can give away during life or death before incurring a federal estate tax is $5,490,000 (will increase to $5,600,000 for 2018). The gift tax has historically served as a backstop against income shifting from family members in higher tax brackets to those in lower brackets. In the absence of a gift tax, we would expect to see a revival in income shifting strategies among family members, which may be why this tax is retained in the Bill (albeit with some changes).
A previous iteration of Trump’s tax proposals called for the elimination of the date-of-death basis step-up, but only for estates in excess of $10,000,000. Under that proposal, capital gains tax would be due only when the beneficiary sells the appreciated asset (not immediately upon death). The current House Bill explicitly retains the date of death basis step-up in its current form.