Proposed Tax Reform

A big issue out in the open is that the current federal administration wants to make some tax reforms. This reform will change many of big tax rules currently in place. Most people are sitting around waiting on guidance as to what will change so they can prepare. There have been proposals made but no legislative language is ready to set the new changes into motion. The goal as of now is to have this completed before the end of 2017. With all the open questions out in the open, here are the big changes with the new guidance.

Currently with individual tax returns, Form 1040, there are seven tax brackets a tax payer could be placed in, the bottom being 10% and the top being 39.6%. This new reform would like to dwindle that down into 3 brackets; 12%, 25%, and 35%. The current tax brackets have set dollar limits that specify which bracket you belong in and denote the amount of tax you are expected to pay. The current proposal does not have anything set as to what levels of income will place you in which bracket.

Currently all individual tax payers might have to pay AMT, alternative minimum tax. This is because congress realized that some high-income earners were able to escape paying income tax due to the amount of deductions they were able to take on their taxes. This AMT amount is supposed to make it fairer that high income earners would not escape having to pay their share of federal income taxes. This new reform would repeal and remove AMT.

For the 2016 tax year, the standard deduction for individuals was $6,300 and for married filing joint taxpayers it was $12,600. The new reform would like to consolidate and make the standard deduction easier by making it $12,000 for individuals and $24,000 for married filing joint taxpayers. This may seem great but one of the biggest changes and possible issues that can hurt 1040 tax payers is the change to the itemized deductions.

With the tax rules as they stand now, a 1040 taxpayer can deduct state and local taxes, mortgage interest and charitable donations, among others. This new reform would like to eliminate several of the itemized deductions taxpayers use to lower their tax liability. This new reform will leave the mortgage interest, charitable donations, higher education, retirement savings, and employment deductions alone. For some, losing the state and local taxes will have a huge impact on their returns and the tax liability he or she owes.

All of this is subject to change as the different governing bodies debate and pass around new ideas and refute others. Again, none of this has any legislative language to back how these provisions will be implemented and it will need that for it to be passed. There are more proposed changes than what is noted above, these are just some of the biggest changes that could affect the majority of 1040 taxpayers.

Posted by Edmund Furphy