Nothing is certain yet regarding tax law changes until 2017, but we do have a better idea now of what is going to happen to your federal taxes in 2017. If you are a business owner and/or make more than $100K per year, your taxes are going down. If you are at the lowest tax bracket, your taxes are staying the same or are going up.
Over the next few days, we’re going to be posting daily USTaxAid blogs with specific points of the Trump/Brady possible tax plan fusion and what you can do to take advantage of these tax law changes.
The biggest question for 2016 tax planning is how to get ready for possible big changes next year.
For federal tax purposes, your taxes are changing.
Based on the latest information at the time of this blog publishing, it looks like President-Elect Trump’s plan will come in line with Kevin Brady’s tax plan. In most cases, it appears that the Brady plan is taking precedence. It’s well thought out and is more detailed than the Trump plan.
Instead of 7 tax brackets, there will be 3. Originally, Trump’s plan had called for 10%, 20% and 25%. It now looks like it will be 12%, 25% and 33%. There is talk that those rate may actually go up.
While the rates are clearly lower at the top end (39.6% changing to 33%), the lowest tax rate has gone up from 10% (existing) to 12%.
While you’re doing your own tax planning for 2016 and then 2017, you need to know whether your personal taxes will go up or down with this new plan. If they are going up, then you may want to push deductions into 2017 to help cushion that blow. If your taxes are going down, then you want to take as many deductions as possible in 2016.
There are two different strategies here because your individual situation is unique.
Remember, too, that this is just your federal tax planning. Your state taxes may be going up! In fact, with the new CA tax rates you may actually end up paying more in state tax than you do in federal tax. Wow!
Currently itemized deductions phase out as your income increases. That phase-out is going to be reduced in 2017, most likely. If you’re in a position where your itemized deductions phase out and you can push the deduction to 2017, that may be something to consider. However, be careful. Brady’s plan calls for eliminating most of the itemized deductions you’ve used. You’ll only be able to deduct mortgage interest and charitable contributions.
If your itemized deductions do not currently phase out, then continue with your same plan.
Some of the other things that have been discussed are Trump’s plan to tax flow through income from partnerships and S Corporations at a lower tax rate than ordinary income. It is probably less likely that will survive into a final bill.
The final change that will be big is regarding C Corporations. I’ll talk about that tomorrow. And I can tell you, I’m excited for this change. You will be too if you have a business that makes money.