Trump's Proposed Tax Plan - A Quick Look
The late nights, early mornings and heavy caffeine consumption associated with busy season are over and I'm ready to start posting more useful information on this blog (it's about time after all).
By now, you are probably aware of our new President's proposals to overhaul and greatly change the federal income tax. At this time, these are nothing but proposals but it is safe to say that some of them will come to fruition in the coming months and will likely apply to your income tax filing next year.
Here's a brief summary of what has been proposed:
The seven current tax brackets with rates of 10%, 15%, 25%, 28%, 33%, 35% and 39.6% would be reduced to just three brackets at rates of 10%, 25% and 35%. The President claims that this would simplify our current tax system. While this sounds like a simplification of our current tax system, in reality it only makes the last calculation on your return somewhat simpler and does not simplify the computation of your taxable income, which ultimately drives our nation's tax policy and our individual tax planning.
The standard deduction for married couples would be nearly doubled to $ 24,000 and presumably the standard deduction for single people would be $ 12,000. Approximately 2/3 of our nation's tax return filers use the standard deduction. The majority of my clients itemize deductions, consisting mostly of mortgage interest, local property taxes, state income taxes and charitable donations. For many of my clients who itemize their deductions, this substantial increase to the standard deduction would wipe out the itemized deductions, since the standard deduction would be greater. I have some clients who chose to accelerate certain deductions in 2016 and others who plan on doing so in 2017 (i.e. making early property tax payments since they will not make an impact on their 2018 taxes). Furthermore, many people in the market to purchase their first home may be re-considering that decision, as the no longer deductible mortgage interest and property taxes would have less or no impact at all on their future taxes.
The Alternative Minimum Tax (AMT) would be repealed under the current proposals. The AMT is a parallel tax system, largely applying to higher income clients. It adds back certain deductions (state and local taxes for most people), and taxes the income at a flat 26% or 28% rate. This tax ensures people at certain levels of income pay a minimum amount of tax no matter what their potential deductions are.
The estate tax would also be eliminated under the proposed tax overhaul. Given that the estate tax currently does not apply to persons who pass away with less than $ 5.49 million in assets, this issue affects very few of my clients.
Perhaps most interestingly, our President has indicated that income from pass-through entities - partnerships, sub-chapter S corporations and single-member LLCs, would be taxed at the newly proposed corporate tax rate of 15%, rather than as regular personal income. Arguably, this could spur more entrepreneurship as it gives people who are thinking about going into business for themselves another reason to do so. However, taxes are usually not what motivates people to start their own business.
All of these proposals, if implemented have been computed as resulting in a substantial loss of revenue to the government, and there has been little explanation as to how the lost revenue would be made up. Larry Summers, who served as Secretary of the Treasury under former President Clinton, has strongly criticized this plan as being unrealistic and states he would have left his job if such a plan had been implemented in the administration in which he served. Therefore, while paying attention to these proposals for your own tax planning is important, it's important to realize these are still just proposals and it is unlikely they will all become law.