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2017 Tax reform updates: The winners and losers so far

by: Anthony Parent   2017-11-06

H.R. 1, "the Tax Cuts and Jobs Act" which is the first draft of the 2017 Tax Reform bill fulfills some of the promises made by Republicans. However, it has got some weak points. In this article I will analyze the major benefits and the drawbacks of the latest tax reform package.

The Benefits of 2017 Tax Reform

 

Corporate Tax rate lowered to 20% for most corporations large and small.  This is a good thing as the current 35% rate (which can be higher in some cases) is the highest in the world. This caused large companies to strip out earnings to overseas entities and pay very little in US tax rates. It caused large players to set up shop elsewhere. This low rate will encourage large businesses to keep profits in America -- tax arbitrage will just stop making sense. Additionally, the 20% tax rate is lower than most other countries, so we can expect foreign national companies to become domiciled in the US, bringing in a huge amount of capital and job opportunities.

 

On the down side, Personal Services corporations are taxed at 25%. I have no idea behind the rationale for this rate. I can't see why it shouldn't be 20%.

 

Some other things that aren't so great: It used to be the dividend rate was 15%. The tax reform bill still has the higher 20%, and also still include the 3.8% ObamaCare surcharge. So, the actual tax rate for a shareholder in a corporation is 43.8%. Even with the lower C tax rate, the 43.8% exceed the top 39.6% tax rate the reform keeps in place.

 
This is what most people don't understand. At an effective 43.8% tax rate, it become important for high income earners to engage is some sort of tax savings. I can tell you right now, the best tax strategy for the wealthy is left untouched. A passive investor can avoid paying all federal and state income taxes. But the trick is, you have to be wealthy already (and you have to be willing to give up some control). What I am looking for is a tax reform plan that disincentivizes the wealthy from having to engage in this elaborate setup. Yes, I understand that this reduces the need for our services, but I suppose I am a human being first, and a tax attorney second (or third).

 

This is why the lowering of the pass through rate of 25% is so significant. Typically the pass through rate has been 39.6%. So, "S" corporations (which actually don't need to be corporations) see some huge benefits, but there is an alarming caveat. This 25% rate would apply to investors in S corporations, but not the manager/owner. There may be a work-around to this that proponents of higher tax don't like - a way to make a passive investor out of an active owner. This is an area of law we will be focusing on advising our clients to take advantage of, if they can.


 
Elimination of the Death Tax
 

The Death Tax, or Estate Tax, hits estates worth over $4.55 million with a federal estate tax. The problem with the estate tax is that for the hyper-wealthy, it is one of the easiest taxes to completely avoid. It just end up hitting small business owner and family farms -- the  people who didn't think they could  afford the transaction costs (or ofan estate plan that frustrates high estate tax rates. The problem is surprising estate tax bills forced many businesses to sell off assets to pay the bill. This resulted in a destruction of capital that benefitted few -- the revenue it brought in is simply not worth the upheaval it creates. We are glad to see this go.

 
Elimination of AMT

 
The Alternative Minimum Tax was introduced in the 1960s so that high income taxpayers couldn't avoid paying all tax. It eliminated deductions and has separate tax rates. It was unbelievably confusing and added stress and worry, and became outdated. We are happy to see this go.

 

 
International Tax Reforms

 

Subpart F

 

My first reading of the Bill seems to indicate that the already complicated Subpart F has become more complicated in order to fight base erosion. I find this addition odd, as the 20% corporate tax rate is a stronger carrot than Subpart F is a stronger stick. Tax reform will alreayd encourage foreign capital into the US. So why does Tax Reform need to make Subpart F worse?

 

(What is Subpart F? Here's an easy-to-understand article.)

 

Tax Reform and TTFI jurisdiction/FATCA repeal

 

I know a lot of our international clients and readers are interested in the proposal of moving from Citizenship Based taxation to a territorial based system. This would eliminate the need for US Expats to file very expensive and time consuming returns -- and sometimes be double-taxed. This Territorial Tax For Individuals (TTFI) did not make it into H.R. 1 even though Paul Ryan did put this goal in a previous outline. According to our frequent guest, Solomon Yue of Republicans Overseas, TTFI may be included later -- this is from the Republican Overseas FaceBook Page:

 

Republicans Overseas didn't expect TTFI to be in today's the TAX CUTS & JOBS ACT. The TTFI inclusion was not even considered before our two petition drives: 1) to President Trump on Oct 2 and 2) to the Congress on Oct 24.

On Oct 25, Chairman Brady told the Financial Times that his committee is seriously considering TTFI. TTFI is now in the Joint Committee on Taxation. Last week, we were told that we need to wait for Chairman Brady's markup to see if TTFI is included.

We are confident that our friends of the House Ways and Means Committee will do their best to get TTFI included in Chairman Brady's markup. When we started this TTFI push in January, nobody on Capitol Hill ever told us it would be an easy fight. We are committed to fight and win this uphill battle.

 

Sadly, I see no mention of repealing the Foreign Account Tax Compliance Act (FATCA). If TTFI if passed it would make obsolete the need for FATCA to be imposed on US expats, but someone could still want FATCA imposed against US persons living in the US.

 

Bottom Line:

 

This can only be looked at as a start. I want the Tax Reform of 2017 to be followed up by the Tax Reform of 2019. We need to get a little bolder and challenge the conceit that the government has a right to tax you based on what you have.

 

Speaking as someone who is paid very highly to help people avoid high tax rates, I know that I have the most to benefit as a tax attorney if there is a complicated system with huge compliance costs and burdens. But like all of our team members here at Parent & Parent LLP, we put our clients first….and we need our clients not to have to pay us so much money!

 

 

Link to H.R. 1 "Tax Cuts and Jobs Act"


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