Given all the chaos in Washington in President Trump's first six months in office, we wanted to provide some guidance to individual taxpayers trying to figure out what to do for tax planning for the rest of 2017, 2018, and beyond. Trump promised tax reform during his campaign, and Wall Street is still banking on it happening, albeit maybe not this year. Here is a list of the top five items affecting your Form 1040.
1) Tax rates. Current state: Federal tax rates are 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. The 25% tax bracket, the one that middle class taxpayers tend to fall in, ranges from $37.9K to $91.9K for individuals, and $75.9K to $153.1K for married-filing-jointly. Outlook: Don't look for many miracles here. The huge growth of entitlements in the last twenty years (Social Security, Medicare, Obamacare, SNAP, unemployment insurance, CHIP, and TANF) has meant that ways to decrease tax rates and control the budget deficit have become scarcer than hen's teeth. Best case is for the elimination of one of the tax brackets (most likely the 25% bracket and an expansion of the 15% and 28% brackets) or point shaving amongst the brackets (e.g., 28% to 27%, 25% to 24%, etc. ). What this means for you: Plan on more of the same taxes with a mild possibility for saving a couple hundred bucks.
2) Morgtage interest deduction. Current state: Mortgage interest on first and second homes are fully tax deductible up to adjusted income of $259,400 (single) or $311,300 (married). Outlook: A complete elimination of the deduction seems unlikely. But a phaseout specifically for the deduction at an income level below the current itemized deduction phaseout is certainly possible. What this means for you: Plan a gradual erosion of the deduction as the pressure on Congress to raise revenues in the face of tax bracket campaign promises builds. If you are about to raise your mortgage interest payments or take on a new mortgage, hedge your bets when budgeting for affordability.
3) State income tax deduction. Current state: State income tax is fully tax deductible up to adjusted income of $259,400 (single) or $311,300 (married). Outlook: The origin of this deduction arose for the original desire by Congress to prevent taxpayers from paying income tax on income that was to be paid as taxes to the states, essentially a double tax on the same income. Lately, though, Congress is floundering for ways to raise revenue. Look for this deduction to be singled out like mortgage interest, earning an earlier phaseout than that specified by the itemized deduction phaseout. What this means for you: This deduction tends to only benefit itemizers with mortgages, so for those folks we recommend the same caution we gave for mortgages. If you are about to raise your mortgage interest payments or take on a new mortgage, hedge your bets.
4) IRA's and 401(k)'s. Current state: IRA contribution limits are $5,500 under age 50 and $6,500 for age 50 and over. 401(k) contribution limits are $18,000 under age 50 and $24,000 for age 50 and over. Roth IRA contributions are limited to those under $118,000 of adjusted income for individuals and $186,000 for married couples. Outlook: Given that IRA's were designed to take the place of defined pension benefits, and then substantially curtailed (as 401(k) matches) by companies following the 2007 financial crisis, its seems unlikely that Congress will tamper with the traditional IRA or the 401(k). But the Roth IRA may be eroded in terms of its maximum adjusted income level. What this means for you: Roth IRA holders may be forced to make traditional IRA contributions and then making back-door rollovers, assuming this is still permitted under new tax law.
5) Capital gains rates. Current state: Capital gains rates are already zero for taxpayers with adjusted income less than $37,950 ($75,900 married). Rates are then 15% up to $416,700 of adjusted income, and then 20% thereafter. Outlook: Although conservative politicians would prefer to lower capital gains rates further, it seems likely that getting both lower tax bracket rates and capital gains rates would be fairly difficult. We're betting that tax bracket rates will win out. What this means for you: No change.
Still not sure what the new upcoming tax laws will mean for you? Give us a call at 301-841-0209, or email us at firstname.lastname@example.org. We can help!