Is Tax Reform Coming?

Contributed by: Nick Defenthaler, CFP® Nick Defenthaler

One of the hot topics in the recent presidential election was tax reform. Although both candidates may have had very different ideas of what changes they felt should be made, they did both agree that it was time to move forward with some type of reform. Our tax code is very confusing and many would also add, unnecessarily complex. The last tax reform we’ve had in the U.S was in 1986 – 31 years ago! Coincidentally, this is roughly the same period of time that elapsed between the reforms that were put in place previously in 1954.

Below is a breakdown of some of the proposals both President Elect Trump and the GOP have expressed as we enter 2017:

President Elect Trump:

  • Tax Brackets
    • Reduce the number of tax brackets:
      • Currently seven different brackets (10%, 15%, 25%, 28%, 33%, 35% and 39.6%)
      • Proposal is to reduce the number of brackets to three (12%, 25% and 33%)
  • Itemized Deductions and Standard Deduction
    • Consolidate the standard deduction and personal exemptions into a single, larger standard deduction:
      • $15,000 for single filers (compared to $6,300 in 2016)
      • $30,000 for those who are married and file jointly (compared to $12,600 in 2016)
      • Cap the total amount of itemized deductions ($200k for married filers, $100k for single filers)
  • Capital Gains Tax
    • Maintain similar capital gains tax rates for the new, proposed brackets:
      • 0% for those who are within the 12% proposed tax bracket
      • 15% for those who are within the 25% proposed tax bracket
      • 20% for those who are within the 33% proposed tax bracket
    • Would eliminate the 3.8% Medicare surtax on net investment income

GOP:

  • Tax Brackets

    • Reduce the number of tax brackets – same proposal as President Elect Trump:

      • Currently seven different brackets (10%, 15%, 25%, 28%, 33%, 35% and 39.6%)

      • Proposal is to reduce the number of brackets to three (12%, 25% and 33%)

  • Itemized Deductions and Standard Deduction

    • Eliminate virtually all forms of itemized deductions except for mortgage and charitable deductions, but like President Elect Trump, consolidate the standard deduction and personal exemptions into a single, larger standard deduction:

      • $12,000 for individuals

      • $18,000 for individuals with a child

      • $24,000 for those who are married and file jointly

  • Capital Gains Tax

    • Allow individuals to exclude 50% of their investment income – including both capital gains, qualified dividends and even interest income and then tax it at ordinary income rates

      • For example, this would mean if you’re in the 33% proposed tax bracket, investment income would be taxed at 16.5%

    • Would eliminate the 3.8% Medicare surtax on net investment income – same proposal as President Elect Trump

While obviously nothing is set in stone and many of these proposed changes could be blocked by a Democratic filibuster, history has shown that we are more than likely due for some type of tax reform in the near future. Stay tuned!

Nick Defenthaler, CFP® is a CERTIFIED FINANCIAL PLANNER™ at Center for Financial Planning, Inc.® Nick is a member of The Center’s financial planning department and also works closely with Center clients. In addition, Nick is a frequent contributor to the firm’s blogs.


The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Nick Defenthaler, CFP®, and not necessarily those of Raymond James. Expressions of opinion are as of this date and are subject to change without notice. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct.
Sources:
http://www.cnbc.com/2016/11/22/how-advisors-are-preparing-clients-for-trumps-tax-plans.html
http://www.forbes.com/sites/kellyphillipserb/2015/10/21/irs-announces-2016-tax-rates-standard-deductions-exemption-amounts-and-more/#28a4d953792e