Taxpayers have the option to itemize their tax return or take the standard deduction to reduce their taxable income. The IRS is currently in the process of implementing the Tax Cuts and Jobs Act (TCJA), a significant piece of tax legislation that will affect individuals, businesses, government entities, and tax-exempt entities. To illustrate how the international provisions of the new tax law can incentivize companies to move profits, investments, and jobs abroad, consider this example. The TCJA would apply to both the profits and gross income of a business or business that would not otherwise be subject to unemployment taxes.
The law proposes that unrealized gains on valued assets transferred by gift during life or retained upon death should be treated as a “realizational event” for tax purposes and taxed as if the underlying property were sold. This graphic compares the effects of the new tax law and the Brown-Khanna proposal, highlighting how it fails to address wage stagnation and growing inequality through measures such as strengthening the Earned Income Tax Credit (EITC). To truly reform taxes, policymakers must create a system that does not have a regressive impact and provides more favorable treatment to those with low or modest incomes. In the coming months, Congress may develop additional tax legislation that could coincide with or differ from some of the proposals in the Green Paper.
Under current law, if a sufficient tax exemption is assigned to a generation-skipping transfer (GST) trust, it will be permanently exempt from GST. The amount of the Alternative Minimum Tax (AMT) exemption is automatically adjusted for inflation, allowing many taxpayers to avoid this tax. There is also some uncertainty about whether foreign taxes are included in the calculation of income and whether they are part of the basket of foreign tax credits for minimum tax purposes. Furthermore, unrealized capital gains on valued assets would be taxed if transferred or distributed in kind from a trust, corporation, or other irrevocable non-corporate entity if such transfers are effectively a gift to the recipient.
All of these changes may take effect as soon as the new tax law is enacted, unless otherwise specified. In line with inflation adjustments, many deductions and tax credits will be gradually adjusted to account for these changes. A net investment income tax (NIIT) or a tax under the Self-Employment Contributions Act (SECA) would apply to the transferred business income of high-income individuals. The new tax law not only harms many working-class families but also encourages multinational corporations to move their investments from the United States to foreign countries. For this reason, it is essential for Congress to develop real tax reform that avoids its regressive nature and provides more favorable treatment to those with low or modest incomes.