U.S. Tax Reform – Chairman Camp’s Discussion Draft: Individual Taxation

For the majority of individuals, Chairman Camp’s U.S. tax reform discussion draft lowers the overall tax burden and simplifies the tax filing process.  The Joint Committee on Taxation (JCT) estimates that taxpayers with incomes below $100,000 would be better off while those with incomes above that level would face a tax increase.  Overall, individuals would benefit under the discussion draft to the tune of $580 billion over the next ten years.

Under Chairman Camp’s draft, there would only be three rates of tax on individuals.  For simplicity, this blog will refer to income levels for single filers and include the married couple rates in parentheses.  A tax rate of 10% applies to the first $36,900 ($73,800) of taxable income, followed by a tax rate of 25% on income over $36,900 ($73,800) and up to $400,000 ($450,000).  Finally, there is a 35% tax rate on income in excess of $400,000 ($450,000).  The draft would eliminate the personal exemption, but increase the standard deduction to $11,000 ($22,000).  The benefit of the standard deduction would be capped at 25%.

Under the draft, most individual taxpayers would no longer itemize deductions on their tax returns due to the increased standard deduction and the reduced number of itemized deductions available.  Most significantly, the draft proposes capping the mortgage interest deduction to the interest on debt of $500,000.  The deduction for interest on home equity indebtedness would be eliminated.  The proposal would also eliminate a wide range of deductions such as those for state and local taxes, real estate taxes, personal casualty losses, medical expenses, and tax preparation fees.  The 2% floor for miscellaneous deductions would be removed, however a 2% floor would be added for charitable contributions.

The combination of an increased standard deduction and a reduced number of itemized deductions would substantially reduce the number of taxpayers filing itemized tax returns.  For many this would be a benefit.  Taxpayers would face reduced record-keeping obligations and the IRS audit process would be more streamlined because inspectors would have fewer expenses to audit.

The draft proposal would also eliminate many educational deductions and tax credits, consolidating them into a $2,500 American Opportunity Tax Credit and removing the student loan interest deduction entirely.

The preferential rates for capital gains and qualified dividends would be removed, however taxpayers would still face lower taxation on those income types through an above-the-line deduction of 40% of the capital gains and qualified dividends from income.

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Roger Royse
rroyse@rroyselaw.com

Roger Royse, the founder of the Royse Law Firm, works with companies ranging from newly formed tech startups to publicly traded multinationals in a variety of industries. Roger regularly advises on complex tax structuring, high stakes business negotiations and large international financial transactions. Practicing business and tax law since 1984, Roger’s background includes work with prominent San Francisco Bay area law firms, as well as Milbank, Tweed, Hadley and McCloy in New York City.
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