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Tax Reform and How It Might Affect You in the Coming Years

Tax Reform and How It Might Affect You in the Coming Years

With the election of Donald Trump as President and a Republican majority in both the House and Senate, tax reform has become a much more realistic possibility. The question of exactly how individual taxation might change is of interest to all, from the wealthiest to those at the lowest economic rungs.

Prognosticators have paid close attention to Trump's promise of reducing the number of individual tax rates from the currently-applied seven to the same three that were proposed by the House of Representatives in June of 2016. Both tax-reform plans have led to predictions of big tax cuts for high-income individuals and increases for those at lower income levels.

Consolidating Tax Brackets

Trump's proposal involves consolidating the currently seven tax brackets down to just three, including eliminating the two highest rates that are now being used. Though getting rid of the 39.6% and 35% rate and replacing them with a 33% rate would clearly be advantageous for high-income taxpayers, the plan goes farther than this in the changes it proposes. It also promises a benefit to those in the lower income tax brackets by doubling the amount that the standard deductions would represent. This would offset the increase in the marginal rates that his plan would impose on taxpayers who previously qualified for 10% tax brackets but who would shift to a 12% proposed bracket.

With taxable income being defined as adjusted gross income less either itemized or standard deductions, the significant increase in the standard deduction would eliminate most of the concerns that the higher rate would otherwise have created. In reviewing the proposal, the Tax Policy Center - a nonpartisan group - has predicted that roughly 60 percent of the 45 million taxpayers who currently itemize their tax deductions would shift to the standard deduction were it to become law.

How Would the New Tax Rates Impact You?

The worksheet below provides a quick and easy way to determine how you would be impacted by the proposed reforms' higher standard deductions and new rates, as well as the changes that have been proposed to how much can be taken in itemized deductions. All you need to complete the worksheet is your completed 2015 or 2016 1040 tax return. Once you have filled in the appropriate information you'll be able to compare the worksheet's line 6, representing your tax rate under the tax reform proposals, to your 1040's line 7 to get your answer.

A Cap on Itemized Deductions

The other significant change that is being proposed under Donald Trump's tax reform is a cap on the amount of itemized deductions that can be taken. Under the proposal, single filers would be limited to $100,0000 and joint filers to $200,000, though it is not yet clear whether the new cap would impact the current system of phasing out itemized deductions based upon exceeding higher-income thresholds. In the worksheet provided above, the change would be reflected in line 2c, as the amount would likely be limited.

There have been rumors that Trump's plan would completely eliminate the personal exemption, which is seen in the worksheet as line 3. For high income taxpayers, the proposed cap would have only a limited effect, as most personal exemptions have long been phased out based on their income exceeding certain thresholds. But for those at lower income levels, and particularly those with large families, losing the personal exemptions that are currently available could have a significant impact.

More Uncertainty than Certainty

Though it is tempting to assume that the tax rate and deduction reforms will pass, and to try to calculate what their impact will be, at this point there is a good deal that is uncertain and many questions to be answered. Among the factors that will need to be determined are what will happen to the Affordable Care Act and whether a number of tax credits that are currently available will continue to exist.

With Republicans promising repeal of the healthcare act, there is a possibility that higher-income taxpayers would see the elimination of its 3.8% excise tax, though this might not actually take place until 2018 because the healthcare marketplace insurance coverages for 2017 have already been put in place.

As for the individual tax credits, these are used so extensively under our current tax system that roughly 48% of American taxpayers end up with no tax liability at all. In fact, refundable credits like the additional child tax credit, the earned income tax credit, the American Opportunity Tax credit and others mean that most end up getting a refund check in the mail each year.

Tax reform is a complex issue that will take the new President and Congress a good deal of time to effect. If you have concerns or questions as changes are made, be sure to speak to your tax professional.

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Spencer Wilson

Spencer Wilson

Spencer Wilson, EA is a tax preparer based in Long Beach, CA. Spencer Wilson Financial Management Services has been serving the Greater Los Angeles Area and Orange County since 2004. <br /> We began in the heart of Naples in Long Beach and we continue to work hard offering tax preparation and planning, business accounting and bookkeeping and payroll services . <br /> We have helped many different people and businesses succeed financially and take control over their finances.

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