Changes to the tax proposal released by House Republicans are assuredly likely, especially since a plan that may be quite different is expected from the Senate in the coming days. Those two versions would have to be reconciled and approved before legislation could be sent to President Trump for his signature. But for now, what big takeaways should advisors and clients focus on?

  • The top tax rate stayed the same at 39.6%, but it only applies to income over $1 million for a married couple, more than twice the level that applies now. That means those at the top level would have more than $500,000 of income taxed at 35% rather than 39.6%, a savings of about $25,000.
  • Higher-income taxpayers would get the benefit of the new lower tax rates on lower tiers of income. For example, income now taxed at the 28% and 33% tax rates would be taxed at 25%. There does appear to be a clawback in place that would prevent high-income taxpayers from benefiting from the 12% bracket, however.
  • The new lowest rate of 12% would replace the current 10%, so that would appear to be an increase on those at the lowest income levels. The larger standard deduction and expanded child credits should address that potential increase.
  • A $300 per taxpayer personal tax credit is scheduled to expire after five years, but it will be hard to take away once it's out there.
  • The estate tax exemption would double, with a plan to repeal the tax after six years; however, this is likely to be lost during the final negotiations. Estate taxes are viewed as a tax only on the rich, not exactly a sympathetic group. It's hard to see that one lasting.
  • After a lot of mixed signals, retirement plan savings provisions appear to be unchanged. That would be a positive for savers although, with lower marginal tax rates for most taxpayers, the current tax benefit of those savings would be reduced – thus making Roth-style plans marginally more attractive.
  • The planned repeal of AMT would go a long way toward simplification. But like the estate tax repeal, AMT is viewed as a tax on the highest-income earners, so it will be hard to see it surviving to the final bill.
  • The deduction for property taxes would be capped at $10,000, but the state income tax deduction would go away. This element is one that will be strongly debated, and I expect this to change.
  • There are good incentives for businesses: the lower corporate tax rate and a new, immediate deduction for the cost of new equipment. Also, the deduction for interest remains in place. The application of the new corporate rate would be complicated, though. The new rate would be 25%, but only on income not attributed to labor. The default assumption is 70% of the income would be exempt from the lower rate. For service firms, like lawyers, accountants and many financial advisors, the assumption would be 100%. They may be able to fight that, but it appears by default those business wouldn't benefit from the lower rate.