Last week the White House issued a preliminary outline for potential tax reform. The administration released the proposed bill with the intention of fulfilling a campaign promise to reduce the tax liability on the middle class. The initial estimate is that this tax bill could save the average middle class family roughly $1,000 a year in taxes. Although it is subject to change, the tax bill in its current construction is more advantageous for some taxpayers than for others:
Taxpayers who could pay less:
- Taxpayers who don’t itemize: The new bill proposes an increase in the standard deduction from $6,350 per individual today to $12,000 per individual ($24,000 if married). However, some other itemizations will disappear, such as the standard exemption.
- Recipients of large estates: Estates of high-net-worth individuals who have more than $5.5 million (or $11 million if married) must currently pay estate taxes. The new proposal eliminates these taxes along with generation skipping taxes.
- Small business owners and professionals: Pass through companies (such as LLC, partnerships, and S-Corporations) are expected to benefit as their maximum tax rate is cut from 39.6% to 25%. The split between what can be considered pass through income versus earned salary (and taxed at a higher rate) is still to be determined.
Taxpayers who could pay more:
- Residents of states with high income taxes: To compensate for the standard deduction increasing so much (see winners above), state income taxes would no longer be deductible.
- High wage employees: These employees do not get to take advantage of the reduced pass-through rates mentioned above, and may be subject to an even higher personal rate as the administration intends to keep the tax system “progressive” so as not to give tax breaks to the rich.
- People with modest itemizations: Since the standard deduction will increase to $12,000, those who contribute modestly to charity or have modest home interest expenses will no longer be incentivized with tax write offs. That is because the standard deduction will likely be larger than the itemized deduction.
Without a doubt, many of the above variables will change as both sides of the aisle come together to work on a simpler tax code. However, the initial proposal provides taxpayers a sense of which tax codes the White House is targeting for change.
At Pinnacle Financial Advisors, we specialize in tax efficient strategies that enable you to achieve your goal earlier or to set your sights higher. Let us know how we can help you navigate the murky tax waters to create a holistic, customized, and tax-efficient plan.
For additional information, check out this article in the Wall Street Journal.