Should I Be Concerned About Federal Tax Reform?

Although the 2016 tax season is upon us, there is a lot of talk about what changes might happen to our tax system going forward.


First, I can’t resist citing some of the more famous quotes about taxes.

Benjamin Franklin said, “In this world nothing can be said to be certain, except death and taxes.”

Will Rogers stated, “The only difference between death and taxes is that death doesn’t get worse every time Congress meets.”

Albert Einstein opined, “The hardest thing in the world to understand is the income tax.”

While we might all agree that we don’t like taxes and we’d like them to be simpler, what would tax reform look like?

It may be worthwhile to consider the history of personal income taxes in the U.S. The income tax was introduced during the Civil War in 1861 and was expanded during World War II. In short, revenues were needed to cover large obligations. In between those periods and now, there have been numerous changes, tweaks and adjustments. Our country’s obligations have not gone away, so taxes probably will stay around for a while.

Tax reform is nothing new, and some degree of tax reform seems likely. In early 2016, Republicans in the U.S. House of Representatives published a tax reform summary of policies, or “blueprint,” that could form the basis of new tax legislation in 2017. President Donald Trump campaigned on the promise of large-scale tax reform. Late in the campaign, the Trump camp released a revised tax plan that moved the candidate’s proposals closer to the House Republicans’ plan.

For now, it may make sense to focus on provisions common to both the Trump plan and the House GOP blueprint, which include:

  • Reducing the number of income tax brackets from seven to three (12%, 25% and 33%).
  • Increasing standard deduction amounts and limiting use of itemized deductions.
  • Repealing the federal estate tax, alternative minimum tax and 3.8% net investment income tax.
  • Lowering the business tax rate from 35% to 15% (Trump plan) or 20% (House Republican plan).

Many differences must be ironed out among all parties.

Who will be affected, and what, if anything, should you do about it?

“People who complain about taxes can be divided into two classes: men and women.” — Unknown

Nearly everyone could be affected by these changes – corporations, individuals and small businesses (most of which are held as sole proprietorships, partnerships or S-Corporations and are taxed at the personal income level). As a result, nearly everyone could be affected by these changes.

Without the benefit of a crystal ball, here a few tips to consider during this period of uncertainty:

  • Pay attention to your deductions. If the standard deduction increases, it may benefit folks who have paid off a mortgage and no longer deduct the interest expense. On the other hand, a lot of people don’t take the time to itemize, even though it could benefit them.
  • Review your estate plan. A periodic review can be a good idea for nontax reasons, but for those with larger or more complicated estates, it might be a good idea to speak with your legal and tax counsel to review various scenarios if estate taxes go away completely and are replaced with something else.
  • Review your investments from a tax perspective. As the saying goes, “It’s not what you make, but what you get to keep,” and this is especially true during periods of tax adjustments. Aside from the price effects to your investments from all of the tax change talk, consider how your investments might benefit, or suffer, from tax reform. For example, if your portfolio is heavily concentrated in municipal bonds, will they still make sense if you land in a lower tax bracket down the road? Or if dividends end up being taxed at a lower rate, will dividend-paying stocks look better?

While it’s impossible to predict exactly what new tax legislation will look like, or to cover all the potential effects of tax reform, it might not hurt to consider some of the possibilities that could affect you. Remember, as we say here in Texas, “Just like the weather, if you’re not happy with the current tax structure, wait a minute, and it will change.”

Speak with your tax and legal counsel regarding your personal situation.

 

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‎02-20-2017 07:30 AM

Content provided courtesy of USAA.

By Robert Steen, CFP, MBA