“Planning is a process of choosing among those many options.
If we do not choose to plan, then we choose to have others plan for us.”
– Richard I. Winwood
I can’t help but wonder, is it just me, or is it becoming a challenge to stay on track with what’s going in Washington with regards to federal tax reform? The uncertainties are evident. The Trump administration released a report on July 28, 2017 regarding the status of all the proposed changes. As it relates to tax reform, the most current report that we are aware of was released on April 26, 2017. If what’s promised is implemented, individuals/families and businesses will be affected.
Healthcare tax reform still remains the most debated issue as this will affect (in one capacity or another) all the taxpayers noted above. Below are some highlights from the April Tax Reform report, an excellent summary was published in the Journal of Accountancy. (Read more here.)
Changes for Individuals and Families:
- The seven (7) current tax brackets will be reduced to three (3). The proposed tax rates range from 10% – 35% compared with the 10% – 39.6% under the current tax laws.
- There will be limitations on certain itemized expenses.
- The alternative minimum tax (AMT) and estate tax will be repealed.
- The credit for child and dependent care expenses will be expanded.
- The dreaded net investment income 3.8% surtax will be repealed.
So what are my thoughts?
The actual taxable income (this is the amount that is used to calculate your tax liability) still remains grey. While some income tax brackets appear to be lowered, what you are allowed to deduct may be reduced as well. For example, if you live in a state with income tax, as most of us do, you may no longer be able to deduct the taxes you paid to your state as an itemized expense. Under the current law this is a deduction when you itemize.
Home ownership may also be discouraged. Under the current law you can deduct your property taxes as part of your itemized expenses. Under Mr. Trump’s plan, this deduction will no longer exist. However, the standard deduction is proposed to increase.
Most individual itemized deductions would be repealed, but the deduction for mortgage interest and charitable donations would be retained.
Here are the top two (2) proposed changes I like under Mr. Trump’s plan:
That sneaky AMT tax will be history. (If you filed your 2016 tax return, you will find this on line 45 of Form 1040.)
The investment income tax will be eliminated. At a rate of 3.88%, this tax seems relatively low but can be a hefty tax if you are affected by it. Investment income includes bank savings interest, dividends, capital gains, etc. (See line 62 of your 2016 form 1040.)
In summary, we often don’t see the government (i.e. IRS) as a business; however, in my opinion it is one. A business has income and expenses. The IRS, like most businesses has a fiscal budget. If the government reduces income from one area, and its expenses remain the same, it will need to find another area from which to get income to cover these expenses. This is Budgeting 101 for both business and personal.
Please keep in mind that this is just a plan, it is not a law. Until it is passed as a bill by both the House and the Senate and then signed by the President, the current law is what we have to abide by.
So how do you plan with what we know?
While we may have little or no control over the decisions made in Washington, let’s shift our focus to what we may be able to control. Planning still remains one of the most cost-effective ways to reduce your tax bill; it also helps to reduce the surprise and sometime anxiety that may await us when we fail to plan.
Be on the lookout for our next article regarding who may benefit from a tax planning consultation.
Want to get a jump on your tax planning? Please call us at 212-966-9301 to schedule your consultation.