United States: New framework for tax reform released - rates are lower, but uncertainty looms for highest-income taxpayers

Oct 2017

A nine-page ‘unified framework for fixing our broken tax code’ (the Framework) was released by the Trump Administration and Congressional Republican leaders on September 27, 2017. The Framework is the latest product of a tax reform working group known as the ‘Big 6’, which includes Treasury Secretary Steven Mnuchin and various other White House and Congressional members.

The Framework lowers individual tax rates – it proposes to replace the current seven federal individual tax brackets with three brackets, with rates set at 12%, 25%, and 35%. The new Framework, however, leaves open the possibility of a fourth tax bracket for highest-income individuals to meet President Trump’s goal of ensuring that tax reform “tremendously” benefits the middle class and not “the wealthy.”

Under the proposed Framework, the alternative minimum tax (AMT) regime for individuals would be repealed. The standard deduction would be doubled but the personal and dependent exemptions would be repealed. The plan would repeal ‘most itemized deductions’ except for mortgage interest and charitable donations, and tax incentives for work, higher education, and retirement security also would be retained.

Proposed changes under the Framework would impact multinational companies with globally mobile employees – those with US citizens and residents working abroad, and those with foreign nationals working in the United States. Employers that have adopted a tax-equalization or protection arrangement should review how these potential tax law changes could impact their tax reimbursement liabilities and gross-up costs for mobile employee populations.

There may be an immediate tendency to conclude that because US federal individual income tax rates generally could be reduced, US federal income tax costs will go down; however, this may not be the case for many individuals. More details are needed and companies should consider that the US federal income tax liabilities of some workers and executives may, in fact, increase. As more information becomes available, companies may want to consider possible changes to tax reimbursement policies, taking into account that tax law changes, if enacted, may not become effective until January 1, 2018.

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