Trump Tax Plan: Part 4

President Trump’s proposal states that:

 With this huge reduction in rates, many of the current exemptions and deductions will become unnecessary or redundant. Those within the 10% bracket will keep all or most of their current deductions. Those within the 20% bracket will keep more than half of their current deductions. Those within the 25% bracket will keep fewer deductions. Charitable giving and mortgage interest deductions will remain unchanged for all taxpayers.

What deductions are going to disappear is unclear.  One that is expected to be on the block is that of State and Local Taxes (SALT).  SALT deduction are one of the largest federal tax expenditures, with an estimated revenue cost of $96 billion in 2017 and $1.3 trillion over the 10-year period from 2017 to 2026.  In government speak, a federal tax expenditure is when you are allowed not to pay in on some part of your income in a deduction that takes your taxable income below 100% of your actual income.  Most of the SALT deductions are real estate and sales tax deductions.  Everyone who pays taxes will get hit with this, but those that have large real estate holdings and consume a lot of things that are taxable for sales tax will get hit the hardest.  Typically, these types of people are weather individuals. 

The proposal goes on to talk about how cutting taxes will boost consumer spending.  That should be an obvious conclusion as is the comment that it will increase savings and investment.  A less accepted comment is that this will maximize economic growth.

Alternative Minimum Tax (AMT)

The AMT goes back to 1969 when it showed that 155 high-income individuals paid no taxes by taking advantage of the then current tax law benefits and deductions to pay no income tax at all, legally. 

In 1970, only 1,900 people had to pay AMT. It has morphed over the years into a monstrosity that hits more and more middle-class individuals that use the deductions that have granted them by the tax code.  It now hits over 5 million taxpayers many making well below $100,000.00.

AMT is also a difficult tax to figure, and many people don’t realize they owe it until their CPA shows them their current tax return. 

Other Tax Items

Outside of the formal, but detailed free proposal that President Trump issue last April, is Obamacare.

Trumps has told the IRS to not enforce the Obamacare penalty for not having health insurance which was a key point in making Obamacare work.  Healthy young people that would not carry insurance because they don’t feel they need it had to be part of the Obamacare system to make it work. 

If they opted out then the premiums on the people, who needed insurance would be much higher.  The incentive to make them join was a penalty on their tax return.  The penalty increased every year until it would be cheaper to buy the insurance than to pay the penalty. 

One of the problems was that the penalty could only come out of refunds and could not get collected separately.  If a taxpayer planned properly and made sure they owed money at the time to file taxes there was no way for the IRS to collect the penalty. 

The Trump administration’s treasury department is still processing penalties under the individual mandate of Obamacare. That's even though hours after taking office on Jan. 20, President Donald Trump issued an executive order instructing federal agencies to waive or defer parts of Obamacare that would “impose a fiscal burden” on states, individuals or health care providers. White House counselor Kellyanne Conway stated in an interview two days later a suggested order could help Trump, "get rid of that Obamacare penalty almost immediately."

The IRS has stated, barring legislation, it will continue to enforce the mandate. "Taxpayers remain required to follow the law and pay what they may owe." The IRS, however, said it would process tax returns this year without the indication of whether the taxpayer did or did not have health insurance as they have in past years. The Obama administration told the IRS to reject these types of returns starting this year.  The Trump administration reversed the order.

Enforcement of the individual mandate has been light and will probably remain so.  The IRS has not been following up with enforcement after sending warning letters to taxpayers who have not been reporting whether they had coverage or not.

If you have any additional questions about this topic, please feel free to email us!  We would love to hear from you!

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