By Russ Wiles
There's little point in doing much income-tax planning yet under the assumption that sweeping tax reform will be enacted soon. No comprehensive reform bill has been drafted, and no Congressional consensus has emerged.
But if President Trump's proposals gain traction in the waning weeks of the year, many individuals will need to pay attention and possibly make quick decisions.
Deductions, income shifting and perhaps even tweaking capital-gain strategies are among the topics that could emerge as year-end action items for individuals, depending on what, if anything, happens. Rep. David Schweikert, R-Ariz., who sits on the tax-oversight House Ways & Means Committee, remains hopeful that a law will get passed soon that will apply to 2017 returns.
"I think we'll get this through before the end of the year," Schweikert said during a visit to the Arizona Republic at the end of September. "There's too much riding on it."
Others are more skeptical, especially given the intense lobbying that will arise once more details are known. But assuming Congress can agree on a bill and pass it, here are some potential issues to watch.
Tax rates and brackets
Trumps wants to reduce the seven income-tax brackets for individuals down to three rates of 12%, 25% and 35%. What's not yet known are the income levels for each bracket.
People who have the means to time certain types of income, such as year-end bonuses or invoices, might be able to make year-end moves that could save money. For example, those who expect to find themselves in a lower bracket next year would want to defer income, if possible, while accelerating or taking deductions in the current year.
Tom Wheelwright, a certified public accountant and tax-book author in Phoenix, sees little chance of reform happening in 2017, especially for individuals, but he considers it somewhat more likely in 2018.
"That means there's a bigger incentive than normal to accelerate deductions and defer income because of the (higher) prospect of a rate reduction in 2018," he said.
Standard deduction
One of the biggest reform proposals for individuals from Trump would involve an increase in the standard deduction to $12,000 for individuals and $24,000 for married couples filing jointly (up from $6,300 and $12,600 currently). The plan also would eliminate the personal exemption, currently at $4,050.
Expanding the standard deduction could reduce the number of itemizers significantly. Currently, only about 30% of taxpayers chose to itemize deductions. If this proposal becomes law and more people go the standard-deduction route, it could simplify tax-return preparation for millions.
"Ninety percent of the population will be able to do their returns on a postcard," said Schweikert.
A postcard-size tax return might have as few as 13 or 14 lines, according to the Institute for Policy Innovation, which supplied an illustration.
Deductions for itemizers
Another notable Trump proposal would eliminate most types of itemized deductions. That means the medical-expense writeoff and those for property taxes, state/local income taxes and various other expenses could disappear. That would give many taxpayers incentive to max out on available itemized write-offs this year if possible — then shift to the standard deduction if reform passes next year.
Trump's proposal would retain the mortgage-interest deduction, though it's possible tighter dollar limits could apply. At any rate, this deduction obviously doesn't benefit the growing ranks of renters. It's also of limited use to people who have paid off their homes or have small mortgage balances remaining. Most Americans wouldn't miss it.
Trump also would retain the deduction for charitable contributions. While this seems like a huge win for nonprofits, it's possible some former itemizers would opt for the standard deduction and pare their donations. Many charities receive a large chunk of their overall donations in the waning months of the year, so tax-reform uncertainty in the weeks ahead might in itself impact giving. But if reform doesn't pass anytime soon, plenty of people will make year-end donations to shave their tax liability for 2017.
Capital gains and losses
Investors often make use of year-end strategies tied to capital gains and losses. For example, someone sitting on a paper gain on a stock might hold off selling to defer the tax bite to the following year. Conversely, someone with a paper loss might harvest it prior to year-end. To the extent realized losses exceed gains, investors can use excess losses to offset up to $3,000 in ordinary income annually, then carry forward the rest to future years.
Trump's tax proposal has been largely silent on capital gains and losses. Presumably, that means the strategies listed above will remain viable for many people.
Miscellaneous provisions
If enacted, reform could affect taxpayers in other ways. For example, Trump has suggested an enhanced child tax credit, repeal of the alternative minimum tax and changes for incentives on college and retirement-savings accounts.
On the latter point, Schweikert said he thinks Congress might expand the use of Roth-type retirement accounts, which don't offer front-end deductions but allow withdrawals to come out tax-free. He also predicted expansion of the retirement savers tax credit, which provides a modest government match on contributions made by lower-income taxpayers.
Trump's plan also would repeal the estate tax. While few Americans are rich enough to trigger this tax — a small fraction of 1% — those affected would have one of the biggest year-end planning opportunities, in the unlikely event that reform comes to pass in 2017. Under that scenario, multimillionaires who held off dying at least until next year potentially could save their estates a ton of money.
Reach the reporter at russ.wiles@arizonarepublic.com or 602-444-8616.