The White House and Congressional Republicans recently came out with their proposed tax reform framework, and taxpayers want to know how the plan will affect them. Although details are still sketchy at this point, a number of policy advocates have taken the basic components of the outline and sought to determine the likely impact on what taxpayers will owe. The plan results in tax cuts for many people, but a substantial number of taxpayers could see their taxes go up if the proposal becomes law in something close to its current form.
One of the key parts of the Trump tax plan is its elimination of most itemized deductions. It specifically says that it will retain deductions for charitable gifts and for mortgage interest, but many other itemized deductions play a substantial role in reducing taxpayers' bills under current law. Although a rise in the standard deduction is intended to offset these lost deductions, it won't be adequate for everyone. In particular, the following five provisions could result in higher taxes for taxpayers.
1. Loss of deductions for state and local income or sales taxes
The state and local income tax deduction has gotten the most attention from policymakers. That's partially because of its size, as it currently represents one of the largest itemized deductions that typical taxpayers take. However, the provision has stoked controversy because of the higher state and local taxes that residents in many traditionally Democratic-leaning states pay. Analysis of the impact of the Trump tax plan has found that residents of these states are more likely to face tax increases than residents of states with little or no state and local taxation.
The state and local tax provision currently extends also to sales tax. Taxpayers can choose either income or sales tax in itemizing deductions but not both, and so the sales tax provision applies mostly in states that don't have an income tax. Nevertheless, even if the problem might be biggest in high income-tax states, it has the potential to snare taxpayers across the country.
2. Loss of deduction for real estate taxes
Real estate taxes are also deductible under current law but would be eliminated under the Trump tax plan. The loss of the real estate tax deduction would dramatically reduce the tax benefits of homeownership, and some fear the potential second-order impact on the housing market from taking away that effective tax break. Those who live in areas with high real estate values and property tax rates are most likely to suffer from the provision.
3. Loss of medical expense deduction
Current law allows taxpayers to itemize medical expenses above certain thresholds. For most taxpayers, expenses above 10% of adjusted gross income are deductible. Those 65 or older can use a lower 7.5% AGI threshold. Fewer people claim the medical expense deduction, but those who do typically face a serious illness that results in huge out-of-pocket costs. Losing the tax break for those expenses represents a financial hit at the worst possible time for those suffering from an illness or injury.
4. Loss of casualty loss deduction
Taxpayers can currently claim an itemized deduction for casualty losses exceeding 10% of adjusted gross income. That's a high threshold, but during disasters like hurricanes Harvey, Irma, and Maria, many people suffered total losses on property that weren't covered by insurance. For those in the future who face similar circumstances, the Trump tax plan would add insult to injury by taking away even the possibility of getting a modest tax benefit to offset their financial pain.
5. Loss of personal exemptions
The rise in the standard deduction in the Trump tax plan is intended to compensate for the loss of the itemized deductions above. Yet the higher standard deduction also takes the place of personal exemptions. Under current law, taxpayers in 2017 get a $4,050 exemption for every eligible person in a household. With the standard deduction rising by $5,650 for single filers and $11,300 for joint filers, those with larger families taking multiple exemptions could see a net rise in taxable income.
The proposal says that it would increase the child tax credit, but the exact amount is unspecified. Moreover, with phase-out provisions for the child tax credit currently applying at certain income levels, some taxpayers might not benefit from the credit boost at all, leaving them to pay more because of the loss of personal exemptions.
Insist on details
One of the biggest problems with the Trump tax plan right now is that so many of its aspects are uncertain. Until taxpayers have explicit provisions detailing the pros and cons of the plan, it won't be possible to come to definitive answers about its impact. That will make it impossible for taxpayers to know whether they'll be helped or hurt by the Trump tax plan.
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