Watching The Tax Proposal Duel Unfold
In all the years that I have been in this profession, I estimate that 95 percent of the time people respond that in the long term, they expect taxes will go up.
Folks, it is crazy to look at where our original tax system started, in 1913. Back then, indexed for inflation today, the tax rates were 1 percent on earnings of up to $463,000, to just 7 percent on earnings over $11.5 million (for married filing jointly). This is very different from todays progressive tax system where, for 2017, taxpayers start at 10 percent on earnings up to $18,650, and shoot up to 39.6 percent on income over $470,700. And, of course, that is without including that pesky little Obamacare tax of 3.8 percent. Kind of reminds me of a famous saying from Steve Forbes when he was running for president in 1996, The politicians say we cant afford a tax cut. Maybe we cant afford the politicians.
Hmm. Uncle Sam seems to get hungrier and hungrier as time goes on.
You see, while in the long term we can almost surely count on taxes going up, but in the short term there is a lot that remains to be seen. Right now we have two different tax proposals battling for attention: President Trumps and Speaker Paul Ryans (the House GOPs). They have some similarities, but also some stark differences. And, dont forget: we have the outnumbered House Democrats who will most definitely try all they can do to filibuster and delay both from being implemented.
A recent blog I read by Michael Kitces lays out the differences between the two proposed tax plans quite nicely. Both proposed plans are aimed to cut taxes and simplify the income brackets. Specifically, both want to cut the number of brackets down to three, which is less than half as many as the seven that are currently in place. Those three brackets would be 12 percent, 25 percent and 33 percent, with that last tier kicking in at $112,500 for individuals, and about double that for a married couple.
Both plans also include shedding the 3.8 percent Obamacare tax, as well as the federal gift and estate taxes that plague many more affluent taxpayers.
In both President Trumps and Speaker Paul Ryans plans, the tax rate cuts are balanced (at least in theory) by limiting deductions, but each in their own way. Speaker Ryan proposes keeping the mortgage interest and charitable gifts deductions, but eliminating all others. President Trump, on the other hand, would keep the current itemized deductions, but would cap them at $200,000 if married filing jointly and $100,000 if not.
Capital gains taxes are another significant piece of these plans. President Trumps plan would keep the current brackets for capital gains taxes; 10 percent, 15 percent and 20 percent, while the GOP aims to change these figures to represent half of its proposed tax brackets for ordinary income; 6 percent, 12.5 percent, and 16.5 percent.
President Trumps plan also proposes some changes to above the line deductions. An above the line deduction, also known as an adjustment to income is a deduction taken from the taxpayers gross income to arrive at Adjusted Gross Income (AGI). These deductions tend to be more valuable than below the line deductions, since they are taken before adjusted gross income is calculated. Remember, Schneider Family Finance readers, that Modified Adjusted Gross Income (MAGI) is used determine certain things, such as Medicare premiums and eligibility for Roth IRA contributions. So, the more a taxpayer can lower his or her AGI or MAGI, the better. (Below the line deductions do not lower either.)
Some of the presidents proposed deductions would benefit parents of young children. For example, within his plan, parents would be able to deduct childcare expenses for up to four children under the age of 13. It would be limited to the average cost of childcare. This does not just include the use of outside childcare, like daycare centers or other third-party facilities, but does include the implied cost of childcare if children are cared for by stay-at-home parents or other family members. This perk could phase out when individuals have an income level of $250,000, or twice that for married couples.
Theres a similar deduction for those caring for an elderly parent or relative in their home, although this gets limited to $5,000 in qualified expenses.
The presidents plan also includes a new Depend Care Savings Account (DCSA), which is the rough equivalent of a Health Savings Account (HSA), but for the expenses of caring for a dependent. These accounts could be funded with up to $2,000 a year, and all contributions would be tax-deductible and would grow tax free. In order to encourage low income families to save, they would also receive a 50 percent match from Uncle Sam into this account if they deposit funds directly into the DCSA.
None of these deductions (or the match) are included in the GOP tax plan.
I will leave you with this. Then-President Reagan said during his presidency, We dont have a trillion-dollar debt because we have not taxed enough, we have a trillion-dollar debt because we spend too much.
Whether either of these plans comes to fruition is anyones guess right now. However, it is important to understand that changes may be coming. Tax planning is essential to any retirement system and I dont think anyone would argue that our tax system is a mess. Heck, even former president Jimmy Carter said, The Federal income tax system is a disgrace to the human race.
Something has to give.
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Questions? Comments? Ask Todd!
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by radical promoting and their editorial staff based on the original articles written by jeff cutter in the falmouth enterprise. This article has been rewritten for Todd Schneiderand the readers of Schneider Family Finance. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.