(Editor’s Note: The Trump administration released its long-awaited tax reform proposal late last month, and it could impact you. You may already be aware of key pending provisions that would impact consumers, including retirees and other people interested in retirement financial issues. This is probably not the case, however, if you’re not a subscriber to a major national newspaper such as The Wall Street Journal or The New York Times, or a magazine such as Bloomberg Businessweek.
So this article presents a checklist of where tax reform proposals stand as of today.
What is likely of most interest to retirees is that there is no sign that the treatment of retirement savings, which largely boils down to tax deferral, will change, at least at this juncture. Also noteworthy is that itemized deductions, at least initially, are targeted for the trash heap, but not the deductions for home mortgage interest nor charitable contributions. In addition, the Trump plan currently limits the maximum tax rate on income from most small businesses to 25%, down from today’s top rate of 39.6%.
Most small business owners pay taxes on a “pass-through” basis, which means that profits are passed through their business to be taxed at their personal income tax rate. Research shows that most small business owners wind up being taxed at 15% or less, but some are taxed markedly more and would benefit from this change.
Most important to bear in mind is that this is just the start of a long process – and one that may ultimately go nowhere. For examples, representatives of states with the highest state income taxes, such as California, New York and New Jersey, already are fighting to retain their state income tax deductions and could well win the battle.
Read this article, authored by Kerry Pechter, for more details and insight. And stay tuned.
The nine-page tax reform framework recently released by the Trump administration referred only briefly to the treatment of retirement savings. There was no sign that the current tax deferral regime would change, but the document left the door open to future adjustments.
Here’s what it said about retirement: “The framework retains tax benefits that encourage work, higher education and retirement security. The committees are encouraged to simplify these benefits to improve their efficiency and effectiveness. Tax reform will aim to maintain or raise retirement plan participation of workers and the resources available for retirement.”
The document, entitled, “Unified Framework for Fixing Our Broken Tax Code,” also contained these proposed federal tax law changes impacting consumers:
“Zero tax bracket”
The framework doubled the standard deduction to $24,000 for married taxpayers filing jointly, and $12,000 for single filers. To simplify the tax rules, the additional standard deduction and personal exemptions for the taxpayer and spouse are consolidated into this larger standard deduction. These changes create a larger “zero tax bracket” by eliminating taxes on the first $24,000 of income earned by a married couple and $12,000 earned by a single individual.
Individual tax rate structure
Under current law, taxable income is subject to seven tax brackets. The framework aims to consolidate the current seven tax brackets into three brackets of 12%, 25% and 35%. Currently, the highest tax bracket is 39.6%. Typical families in the existing 10% bracket are expected to be better off under the framework due to the larger standard deduction, larger child tax credit and the expectation of additional tax relief.
An additional top rate may apply to the highest-income taxpayers to ensure that the reformed tax code is at least as progressive as the existing tax code and does not shift the tax burden from high-income to lower- and middle-income taxpayers. The framework also envisions the use of a more accurate measure of inflation for purposes of indexing the tax brackets and other tax parameters.
Enhanced child tax credit and middle-class tax relief
The framework repeals the personal exemptions for dependents and significantly increases the Child Tax Credit. The first $1,000 of the credit will be refundable, as it is under current law. But the framework increases the income levels at which the Child Tax Credit begins to phase out. The modified income limits will make the credit available to more middle-income families and eliminate the marriage penalty in the existing credit. The framework also provides a non-refundable credit of $500 for non-child dependents to help defray the cost of caring for other dependents.
Individual Alternative Minimum Tax (AMT)
The framework repeals the existing individual AMT, which requires taxpayers to do their taxes twice. The nonpartisan Joint Committee on Taxation (JCT) and the Internal Revenue Service (IRS) Taxpayer Advocate have both recommended repealing the AMT because it no longer serves its intended purpose and creates significant complexity.
The framework eliminates most itemized deductions, but retains tax incentives for home mortgage interest and charitable contributions.
Death and generation-skipping transfer taxes
The framework repeals the death tax and the generation-skipping transfer tax.
Tax rate structure for small businesses
The framework limits the maximum tax rate applied to the business income of small and family-owned businesses conducted as sole proprietorships, partnerships and S corporations to 25%, compared to a maximum of 39.6% under current tax law. The framework contemplates that Congress will adopt measures to prevent the re-characterization of personal income into business income to prevent wealthy individuals from avoiding the top personal tax rate.
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