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What will individual tax reform look like?

lores_miscellaneous_irs_1099_form_pen_calculator_amWill we get comprehensive tax reform in 2017?  In this continuing series of articles, we will focus on individual tax reform.  With the filing of your 2016 income tax still return still fresh in your mind we will take a look at recent announcements from the Trump administration and House leadership.  We will also give you our thoughts on the likelihood of getting tax reform by the end of this year.


Initial Proposal

First, we will look at the changes that have been recently proposed by the White House as well as from information that was release during the campaign.  Though light on details, similar ideas have been floated in the past from House Leadership on tax reform.  Any legislation that is ultimately passed will incorporate many of these ideas.  The details that follow are obviously nowhere near firm.  The new rates would be 10%, 25% and 35%.  Brackets would most likely go from less than $75,000, $75,000 to less than $225,000, and more than $225,000, respectively, for a married couple and half these for single. Actual brackets have not been provided in the recent plan by the President.  The existing capital gains rate and qualified dividend rates would remain the same.  However, this may be eliminated as part of any corporate tax reform.  The standard deduction would be doubled across the board.  The goal is having fewer taxpayers itemizing.  The alternative minimum tax (AMT) would be repealed.  Some tax deductions and credits would be eliminated.  The deductions for mortgage interest, charitable contributions and retirement savings are specifically preserved.  However, total deductions may be capped at $200,000 for a married couple and $100,000 for single.  The child care/elder care benefit would be expanded.  This may be in the form of an above the line deduction per child or elder dependent.  Credits for low income individuals similar to the earned income credit and dependent care savings accounts may also be introduced.  In addition, personal exemptions and the head of household filing status may be eliminated.

When will it happen?

Let’s now look at the possibility of passage this year.  Make no mistake this is a huge tax reduction.  Without revenue raisers, any tax reform legislation faces some daunting hurdles.  Any economic growth that results in future additional taxes won’t be enough to offset the ballooning deficit caused by these cuts.  Repeal of the Affordable Care Act is far from over even with the recent passage in the House.  This will create further distractions and limit resources to push for reform.  The President will make an all-out effort for tax reform this year.  Treasury Secretary Steven Mnuchin has said that they were determined to “…get this done this year.” However, with the Democrats unlikely to go along with any tax plan, passage of permanent tax reform is not likely in the Senate given the budget reconcilement rules that requires bills to not raise the deficit beyond 10 years to avoid a filibuster.  The deductions facing elimination also have support in the private sector and on the Hill that aren’t likely to go away without a fight.  Lawmakers from high state and local income tax states like New York and California are already lining up to save the state income tax deduction.  The President may have to settle for temporary cuts that won’t affect the deficit beyond 10 years.  We look for something similar to what was passed by President George W. Bush in 2001 and 2003.  The cuts will be smaller and ultimately will not carry the punch of a broad overhaul bill, at least not this year.  Any corporate tax reforms face similar challenges.  We will look at those proposals next time.


About the Author

Jim SnyderJames Snyder, CPA, CSPM is a principal at YHB in the Leesburg, VA office. He provides income and estate planning services, business consulting, and estate and trust administration services to successful individuals in many professions, especially engineering, law, technology and real estate. He also provides strategic guidance and planning for clients involved in stock option transactions and wealth transfer.

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