As a new administration takes up residence in the White House, most Americans are preparing to file their 2016 taxes. But if the new administration has its way, the tax-paying process could look quite different a year from now. President Donald Trump has promised sweeping changes to the tax code. While nobody knows yet exactly what changes will be made, we can expect some tax-paying shakeups in the next four years.
“Trump ran on a tax platform that simplifies the current tax rates, so right now there are seven, and he wants to shift downward to three,” says Travis Sollinger, CFP, director of financial planning at Fort Pitt Capital Group, a Pittsburgh-based wealth management firm. “From a personal income tax standpoint, we can expect a simplification.”
Trump has proposed that taxpayers in those three tax brackets would pay 12 percent, 25 percent and 33 percent of their income in taxes, respectively. Other changes he has proposed include eliminating the federal estate tax, the 3.8 percent Medicare surtax on investment income, and the alternative minimum tax, says Leslie Thompson, CFA, CPA, managing principal at Spectrum Management Group in Indianapolis. Trump has also proposed implementing a cap on itemized deductions and increasing the amount of the standard deduction, and implementing new deductions and credits to cover certain expenses for childcare and elder care.
Potential Effects on Your Tax Bill
If the president has his way with the tax code, “the proposed changes would impact taxpayers at all levels,” Thompson says. “However, for those who have significant itemized deductions, the change may not be as significant compared to those of similar income, but fewer itemized deductions.”
In general, the average taxpayer would see a reduction in their federal income tax liability, except in a few specific circumstances, Sollinger adds. For instance, parents with large families who are accustomed to getting a tax deduction for each child may not see their taxes go down.
“Under the new Trump plan, deductions for each child would be gone,” Sollinger says. “The plan eliminates the personal exemption, and increases the standard deduction for all taxpayers. This proposal is likely something that wouldn’t happen until further down the road, though.”
How to Prepare
Keep in mind that Congress sets tax policy, so these potential changes will require legislature agreement.
“An overhaul of tax policy will be a matter of negotiation in an attempt to balance a reduction in taxes, desire to increase infrastructure spending, and the national debt burden,” Thompson says. “Until we get greater clarity on what the structure, [sticking to] the status quo is the best course of action.”
While there are no specific tax-planning strategies to implement proactively, make sure you are talking to your tax preparer about how any of the potential changes could affect your personal tax liability, Sollinger says. “You need to be educated so that when the changes do occur, you understand how it could impact you personally,” he adds.
Rather than panicking about potential changes, Thompson recommends focusing on financial strategies—such as saving—that are smart in any tax environment.
“Remember that tax policy will change many times over the course of one’s life,” she says. “Having a sound savings plan will be important, regardless of current tax code to ensure success in the future.”
On Thursday, we'll cover Trump’s tax plan for small businesses, freelancers, and independent contractors. Stay tuned!