Its hard to say how all Trump’s tax reform plan will play out, but Annette Nellen, CPA and Professor at San Jose State University, has some predictions for potential tax reform.
These might be what changes and effects we’ll see in the next year.
Suspected components of the Tax Reform Act of 2017-18
- Lower rates for individuals & businesses
- Reduced tax credits other than the Earned Income Tax Credit, and Researce & Dev Credit
- No Alternative minimum tax
- Simplification for individuals – larger standard deduction, fewer itemized deductions
- Territorial system to reduce ability to shelter tax income
- Repeal of the estate tax or modification beyond a minimal value
Source: Annette Nellen blog, CPA, Professor at San Jose State Universityhttp://www.21stcenturytaxation.com/
What will be the effects of 2017-18 tax reform? Tax breaks for all?!….sorry, probably not. Judging by the now failed American Health Care Act reform, it won't be that easy, and if we’ve learned anything recently, its clear Republicans will have to give up a little of their wish list get a shot at passing any serious tax reform that hasn’t really happened since the Reagan era.
Some concerning things about the proposed changes…
What might hurt the average Jane & Joe is the elimination of many tax credits and deductions. The Earned Income tax credit and the business tax credit for R&D will probably stay; the EITC is a lifeline to working parents, so definitely a need. But if others are axed, like losing the child tax credit would hurt working families and if the learning credits are also phased out, people trying to move up the economic ladder would take a hit, their only crime…. striving for an education.
President Trump’s plan (at least last we heard) at this early stage is simplifying the tax code, eliminating many credits, but also raising the standard deduction much higher to compensate. With the higher standard deduction, the threshold to make itemizing deductions worthwhile will climb, and lead many people to simply file with the standard deduction, making all the property tax and mortgage interest statement chasing a thing of the past. Maybe a good thing, but an unintended consequence, less people using the “home sweet tax shelter” deduction. Raising the standard deduction will likely lead to less tax return itemization, and ultimately make home ownership less attractive unless you’re in jumbo loan territory. In effect, reducing the number of people who can claim the mortgage interest tax deduction and to some extent, discourage home ownership; what is considered the hallmark of middle class in America…. the American dream to own your home.
We're becoming a nation of renters already, this will drive that trend even more. Its clear the tax code needs simplification, but we need to be careful what we change.
With the Health Care bill defeat fresh in mind, its very probable any tax reform will have to be a watered down version of what Trump promised during the campaign, and Republicans will have to find some common ground to really get any legislation through. I suspect many of the current home deductions and other credits will stay in order to appease moderates. In exchange, the White House may get to raise the threshold for the estate tax, maybe eliminate the overly complicated alternative minimum tax, something I suspect they have wanted for a long time.
In an interest to save face from the Health Care embarrassment and get at least some legislation done before midterms, Trump and his team must revisit the “Art of the Deal” to get a win on the books. Its clear the White House will need to cater to Congressional moderates and democrats if any tax reform is to have a chance, and that should be good news for the average taxpayer. Stay tuned, it will be interesting, even entertaining to see how this turns out.
Tax code may turn out to be just a tricky to change as health care…. Glad I’m not in politics,
#Big League
Thanks for reading,
Matt Smith, CPA
Lighthouse Associates, PLLC
www.Lighthousecpa.rocks