We asked a longtime Fool to help us understand the proposal.
Note: This article is intended to be educational and does not serve as tax advice. For guidance on your personal tax position and how it may change with the suggested legislation, please consult a tax advisor.
Tax reform is in the news this fall, as the Trump administration and GOP members of Congress try to make changes to the tax code.
Regardless of the politics of the issue, we at Motley Fool Asset Management think all taxpayers and investors should stay educated about the possible effects of tax reform. To that end, we spoke with a writer at our sister company for further insights. Dan Caplinger is a longtime personal-finance writer for The Motley Fool, LLC- the publishing arm- and has covered the tax reform plans in detail.
Here’s what he had to say.
Broadly speaking, who stands to see tax cuts under this proposal? Who stands to see tax increases?
Dan: Until the final version of the legislation is determined, we won't be sure exactly who the winners and losers will be. However, the increase in the standard deduction should benefit those who don't currently itemize their deductions, as well as those who have small families. The elimination of several tax provisions, including the alternative minimum tax [AMT], the surcharge on net investment income, the additional Medicare tax, and the estate tax, would primarily help wealthier taxpayers, as would the reduction in top individual tax rates to 35%. Business owners would also benefit greatly from the reduction in the maximum tax rate on pass-through business earnings to 25%.
Larger families and those who itemize their deductions currently could end up paying more under the proposal, depending on what ends up in the final version. The elimination of the personal exemption will hurt larger families, but the proposal calls for increases in the child tax credit that could offset tax increases from losing the exemption. Those who itemize now might get little or no benefit from the higher standard deduction, and the removal of the itemized deduction for state and local income or sales taxes, medical expenses, and other less common write-offs could not only boost taxable income but also take away any real benefit from deducting mortgage interest and charitable contributions.
Again broadly speaking, what are some of the ways someone’s tax bill could change if the tax plan passes?
Dan: Many provisions have the potential to offset each other, so it's entirely possible that people with similar incomes could see different impacts from the proposal. The higher standard deduction could produce substantial savings, as could higher child tax credits and non-child dependent credits. The disappearance of the AMT would make things a lot easier for those earning between $200,000 and $400,000, especially in high-tax states. Yet the elimination of most itemized deductions will hurt some taxpayers, and those with large numbers of dependents could lose more from missing out on personal exemptions than they gain from a higher standard deduction. Each taxpayer will have to work through his or her own situation.
Is there anything in the tax plan that would potentially affect the guidance you give clients about how to save and plan for retirement?
Dan: Not particularly. Lower tax rates make it slightly less valuable to defer taxes, shifting preferences slightly toward Roth-style IRAs and 401(k)s over traditional retirement accounts. Yet without major changes to investment-related tax provisions, a lot of the same advice to investors will still work.
Much of the coverage of the plan centers on the proposed reduction or elimination of certain tax deductions and exemptions. Which of these proposed changes would be likely to have the biggest impact on taxpayers still saving for retirement? What about for taxpayers already in retirement?
Dan: For those still working, the loss of the state and local income tax deduction will have the biggest impact on those in states that have high income taxes. That provision won't have as big of an impact on retirees, but the loss of deductions for medical expenses grows in importance as taxpayers age, and for some, that will eliminate what could have been a big tax break during years in which one has particularly expensive healthcare needs.
Given how familiar you are with the tax code, what are some changes you’d make to it if you were in charge?
Dan: Even more radical simplification would be extremely helpful. Incorporating lower income tax rates with a value-added tax would tie some taxation to consumption, rewarding savers and encouraging more thoughtful spending choices. The resulting income tax would need to be even more progressive to offset the more regressive nature of a value-added tax, but such an income tax could be tailored to make the system of taxation on the whole as progressive as it is now while hopefully being far less complicated.
The one thing I'd suggest is that taxpayers be given a 5-to-10 year “heads up” before any major changes go into effect. But given the political nature of the tax question, I doubt that will ever happen.
For more information as tax reform efforts unfold, you can follow Dan's article feed. In addition, Dan recommends visiting mainstream news websites including The Wall Street Journal, The New York Times, and The Washington Post for further coverage.