Tax “Reform”: starting the next war before finishing the first

OK, let’s start a battle over tax reform before we finish healthcare.  That appears to be the ben_franklincurrent mantra in Washington.  Keep enough balls in the air at the same time and people will become confused and bored.

However, if you’re a middle income taxpayer, the proposals on the table aren’t nice.

Here are some of the key options under consideration:

  • Tax reform will be “revenue neutral.”  That means any tax reductions will be offset by tax increases.
  • Reduce the top tax rate for the wealthy from 39.6% to 33.0%. The minimum tax rate would increase from 10% to 12%.
  • Increasing the standard deduction to $15,000 for individuals and $30,000 for married couples filing jointly.
  • Eliminating all personal and dependent exemptions.  That hits people with children as well as those providing care for disabled and elderly adults.
  • Capping or eliminating itemized deductions, and in particular, eliminating the deduction for home mortgage interest. However, some childcare expenses “up to the state average” might be deductible.
  • If some itemized deductions continue, they would be capped at $100,000 for individuals and $200,000 for couples, which will impact major charities and non-profits.
  • Making employer-paid health insurance taxable as income.
  • Elimination of gift and estate taxes.
  • Elimination of Alternative Minimum Tax.
  • Elimination the 3.8 percent tax on net investment income on people with incomes of over $200,000 for single filers and $250,000 for married filers.
  • Reduction of the corporate tax rate from 35% t0 15%.

Most of these changes would not take affect until the 2018 tax year.

According to the Brookings Institute, the primary beneficiaries of these changes are individuals and households earning more than $143,000 per year.

Single parent families would lose deductions and face sharply higher taxes.

Married couples with children would benefit from Trump’s original tax reform proposal, but would be penalized under the House GOP plan.

The loss of the mortgage interest deduction will change the economics of buying a home, making home ownership much less attractive. If you get the same amount off your taxes whether you own a home or not, why pay a premium price to buy? Further, since the housing industry is such an important part of the US economy, that supports forecasts of continued sluggish economic growth.  

Very little is definite at this time on either tax or healthcare reform.

What you need to consider

If you’re thinking about buying a house, you might want to wait to see if Congress eliminates the mortgage interest tax deduction. If they do, housing prices should fall. Conversely, if you are thinking about selling, you might want to hurry up and do it.

The same logic applies to changing jobs. If itemized deductions disappear, that would include deductions for moving to take a new job.

Finally, some analysts feel that the stock market has gotten overly excited about what Trump might include in his tax plan, leading to prices that are unjustifiably high.

It’s time for common sense to “trump” any excitement over change.


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