By Nathan Vinson, Attorney
English, Lucas, Priest and Owsley, LLP
Improvements to tax law and reducing taxes are a very popular item on most politicians’ platforms. You won’t find anyone who openly says people should pay more. At least, not anyone currently serving in office.
They’re right, by the way – our tax code is far too cumbersome and it changes constantly. (And no, I’m not running for office.)
President Trump has indicated he wants to reform the tax code and change the way people pay taxes. Lawmakers are reportedly discussing how to do that while paying for expensive new initiatives. How can you do it all?
That’s the big question. The public on either side of our divided aisles won’t stand for eliminating tax breaks that are especially popular. IRS statistics from 2016 indicate that 29.6% of individuals used itemized deductions for their tax returns. These deductions are near and dear to their hearts and wallets.
Here, we review some that are most commonly used deductions.
- The tax break for charitable contributions. Both Trump and members of Congress say this deduction will remain, which is great. This is a key motivation for many charitably minded individuals and families to support causes they love. In 2016, Americans gave $389.05 billion to charity, a 4.2% increase from 2015. As the stock market continues its upward trajectory, you can expect this generosity to continue.
- Home mortgage deduction. This is another bedrock deduction that Americans are very accustomed to writing off on their taxes, and often use as a reason not to pay off a mortgage earlier. Don’t expect that this will be cut, but you could see modifications on deductions for second homes.
- Tax breaks for retirement accounts (IRAs and 401(K)s) are part of the current tax code. This probably won’t change, but it could. The average American worker is setting aside 8.4 percent of their income in 401(K)s, reports the Motley Fool.
- Lower tax rates for capital gains and qualified dividends. At most, these can be taxed at 23.8%. The highest individual rate on ordinary income is 39.6%.
- Earned income tax credit. The IRS notes that 28.5 million taxpayer returns claimed this credit, claiming a collective $68.3 billion. This primarily benefits low- and middle-income families.
This isn’t to say any of these are on the chopping block. But you can expect some changes to them if the push to reform tax law continues. Congress and the White House may not change them or cut them entirely, but chances are, changing them even modestly will be seen as a way to raise revenue.
What happens next is up to Congress and President Trump. Our hope is that someone will be willing at some point to do the tough work of untangling our very complicated tax code and making it more user-friendly for taxpayers and tax professionals alike.
I invite any comments medical and legal professionals may have, as well as those from the general public. If you need an estate or tax attorney, you can reach me at firstname.lastname@example.org or (270) 781-6500.