The House released an outline of a plan to make major changes to the current tax code last week – a move that is now making headline after headline as the plan heads through Congress and the president is prioritizing tax reform as a major part of his agenda.
So what is the plan as it now stands, and what might this mean for you? Take a look below to see some high-level changes being proposed.
Married Couples Filing Jointly: 2017 vs. Proposed Tax Plan
Generally, the proposed plan lowers or maintains rates for five of the seven current income ranges, and increases rates in the other two. It also reduces the number of income tax brackets from seven to four.
Some other proposed changes include:
- If you are among the wealthiest of tax payers, the tax rate remains the same, except the income level increases to $1 million for married couples. This is increased from $480,051 currently.
- The lowest income rate increases, but the plan aims to balance this with an increased standard deduction and a larger child tax credit.
- The plan also eliminates the Alternative Minimum Tax (AMT), and the estate tax on inheritances, which currently impacts those inheriting $5.49 million. This repeal will take place over six years, during which time, the proposal will double the amount of exempted inherited wealth to $11.2 million per person ($22.4 million total for married couples).
Standard Deductions – 2017 vs. Proposed Tax Plan
Source: New York Times; proposed deductions would increase with inflation in 2018.
If you are single, then the proposed plan will nearly double the standard deduction allowed, and eliminate the personal exemption (which is based on the number of taxpayers and the dependents claimed on a return).
Other changes proposed include:
- Most filers will be able to claim a higher single deduction under the proposed plan, with the exception of those claiming multiple children. There is a chance that the higher child tax credit and additional non-child dependent credit proposed can make up for the difference.
- You can choose the standard deduction or itemized deductions but not both. According to the New York Times, 70% of filers currently choose the standard deduction because it’s higher than what they qualify for in itemized ones.
So what about itemized deductions? Most of them – including those used for state and local tax expenses – would be eliminated. The plan, however, proposed to keep the deductions for mortgage interest expenses and charitable giving, as well as the incentives for education and retirement savings plans.
What Else Will Change?
The proposed plan aims to reduce the corporate tax rate 10% to 20% (down from 35%) with the hopes of making American companies more competitive with other global companies. Also in the world of business and taxes – “pass-through businesses” (e.g. partnership, S corporations and sole proprietorships) would have a new tax rate of 25%.
However, some of the more complex business tax issues remain to be worked out, such as the possibility that wealthy individuals could take advantage of this lower tax rate by incorporating as a pass-through business.
It’s important to note that the proposed tax changes currently being discussed are from the House version of the bill. The Senate version has not yet been released and there will likely be significant changes before a bill is passed.
As of right now, it appears that there will be broad tax cuts that will have a positive impact on many taxpayers. The Alternative Minimum Tax (AMT) is on the chopping block and some households could potentially save quite a few dollars if that tax is repealed.
While it’s always interesting to watch the negotiations unfold and figure out how they might impact your own life – for better or for worse- we encourage you to avoid making any significant changes to your tax management strategies before the new legislation passes. If/when the proposal is signed into law, you’ll then be able to adjust your strategies accordingly.
This blog is for informational purposes only; we are not in the business of providing tax or legal advice and we generally recommend seeking the advice and counsel of a tax professional before taking any action that may cause a material taxable event.