Since the GOP’s first attempt at shifting the current tax code was shot down in Congress, they have released another, broader tax framework. This new plan has several components Congress will need to hash out before voting on a finalized plan, but taxpayers of all income levels are likely curious about how this framework may impact them. Below are five elements of the new plan that could affect you and your taxable income:

1. Deduction Increase (for many)
   For many taxpayers, the proposed code would nearly double the current standard deduction. Filers who claim multiple children would not see as steep an increase, but could see that offset by a larger child tax credit. With the current code, approximately 70% of taxpayers take the standard deduction since it is higher than itemizing. Many experts believe that percentage would rise if the standard deduction is doubled. To offset the increase in standard deductions, the GOP’s plan would discard other deductions, although the charitable contribution and mortgage interest deductions would remain.
2. Rate Shift
   The current tax code has seven income tax brackets, but the new plan would decrease that down to three: 12, 25 and 35 percent. The plan does not define which income levels would be taxed at each new rate, but wealthy taxpayers will likely see the largest rate drop since the current top bracket at 39.6% would decrease to 35%. The lowest bracket (at 10%) would see an increase to 12%, but the new framework claims to assist families in that bracket through the raise in the standard deduction and a larger child tax credit.
3. Elimination of Some Taxes and Deductions
   One major deduction that would be removed with the new GOP plan is the local and state tax deduction. This deduction is often taken in states where average income and taxes are higher, states that are usually Democratic. Other eliminations include the alternative minimum tax and the estate tax for those who receive an inheritance in excess of $5.49 million.
4. Corporate Tax Code Changes
   The new framework suggests dropping the corporate tax rate to 20% from the current 35%. To offset this drop, the plan proposes eliminating other business credits and deductions. The plan notes that the deduction for domestic production could be removed, but the exceptions for low income housing and research and development should be kept. However, these suggestions are left open-ended, to be decided by Congress for a finalized plan.
5. New Tax Rate for “Pass-Through” Businesses
   The plan would also look to create a new standard tax rate for S corporations, sole proprietorships and partnerships at 25%. Currently, “pass-through” businesses comprise about 95% of the nation’s business demographic and pay the individual tax rate of their owners. Many business owners pay a rate that is lower than 25%, and just under 2% of those business owners pay the highest tax rate of 39.6%, meaning they could see a notable drop if they are allowed to incorporate as a “pass-through.”

Taxpayers should, however, be prepared for changes to come with this plan before anything is signed into law since Congress must scour through it and make adjustments before anything comes to a vote. As developments are made, B&Y will continue to keep our clients up to date in future blogs.