There is a lot of talk in the media about a few of the changes under Pres-Elect Trump’s new tax plan and the House GOP (Brady) tax plan.
Corporate tax rates are likely to go down to 15-20% from a high of 35%.
The estate tax is going away.
And then there are some changes that aren’t getting as much press that might be even more important for you.
Right now, on the date of this blog, there is nothing that has been decided. So, everything here is really a best guess based on the information that is now available.
When you calculate your personal income tax on Form 1040, you start with your total gross income including things from wages, net business, rental income, flow-through entities like partnership and S Corporations. And from that you then subtract things like IRAs and that leads to your adjusted gross income. From that you either deduct your itemized deductions or your standard deductions. And finally from that you subtract your personal exemptions.
The current standard deduction is $6,300 if you’re single or $12,600 if you’re married filing jointly. Pres-Elect Trump’s plan is to increase that to $25,000 and $50,000. You either get a deduction for the standard deduction or itemized deductions. So this means that most likely less people will be itemizing their deductions, simplifying their taxes.
That’s where the term “postcard tax return” comes from. Unless you have a big mortgage or some other unusual expense, the chances are good that you’ll just use the standard deduction. I know that my husband I will because we have so few itemized deductions these days.
Currently, itemized deductions phase out as your income increases. The plan is to reduce the phase out so that you don’t lose so much in deductions.
In previous blogs, I talked about how the tax rate is changing too. So your taxable income will likely be lower plus the tax rate that your tax is calculated on will also change.
The GOP House plan eliminates the personal exemption, which is currently $4,050 per person. Instead there will be $500 credit. Credits directly reduce the tax you pay. The exemption reduced your taxable income. So, depending on your tax rate, the credit could be much more valuable. Trump’s plan also eliminates the personal exemption but does not replace it with a credit.
One of the most significant changes, at least in my CPA tax planning world, is the elimination of AMT (alternative minimum tax). I have clients right now who will be excited to hear that AMT is gone! This is an alternate way of calculating the tax you pay. Not all deductions are allowed. Some tax-exempt income suddenly becomes taxable. It’s a completely different way of calculating taxes. Frankly, it’s a major pain and often unexpected for my clients.
One other possible change that bears mentioning is an upper limit on the tax of flow through entities such as partnerships and S Corporations. This was a core part initially of Trump’s plan, but it appears that it may be abandoned in favor of the emphasis on C Corporations. If more companies move to C Corp structure, the point might become moot.
We’re going to be talking about these issues discussed here and in the previous blogs in the group coaching classes on the 1st and 3rd Wednesday of the month. They are at 5 pm Pacific. You can ask questions, download pertinent Home Study Courses (normally retailing for $99 or more each) and the calls are recorded.
You can join the coaching at USTaxAid.com/coaching