With the fight over federal tax reform on everyone’s lips, it’s impossible to turn on the radio, watch TV, or sign on to social media without hearing about its potential impacts.
The problem is, one taxpayer’s loophole is another taxpayer’s deduction or deferral. Each taxpayer has made personal or business decisions based on the expectation of existing tax benefits being there in the future.
Even the seasoned tax professional, and after over three decades in the field I am well-seasoned, asks, “What will tax reform mean to the average American?”
The Big Three Changes
Attached is a good (and blessedly short) article from Accounting Today providing details (yes, calculations) of the impact of the Big Three changes the average upper middle-class American would notice. The Big Three changes include:
- Loss of current year retirement plan savings deferrals;
- Loss of home mortgage deduction; and
- Loss of local sales or income tax deduction.
Yes, those tax deferrals or deductions would be replaced with other tax benefits. However, taxpayers have made economic decisions in response to those deferrals and deductions. Those decisions may not be easily changed with a change in tax law.
How Could the Changes Affect You?
For example, a taxpayer purchased a home, anticipating the home mortgage deduction savings on their tax return would allow them to utilize the itemized deduction for their home mortgage interest, real estate taxes, and other itemized deductions – also making charitable contributions more appealing.
After learning about the changes proposed though tax reform, they now realize there is no tax benefit to taking out a home mortgage, or to paying real estate taxes on a primary residence. The standard deduction has been increased to offset the loss of these deductions, but a taxpayer need not incur these expenses to take the standard deduction.
Had they known about the change in tax law prior to purchasing their home, they may have made a different investment decision. They may have continued to rent and purchased a rental property to rent out to someone else. Undoing the decision to purchase a primary residence is not a quick change.
The Accounting Today article is relatable and shows how the average taxpayer will feel the effects of proposed legislation. We have no crystal ball to see what will happen with tax reform, but if you have an opinion about tax reform, we recommend you communicate with your legislators.
If you have questions about this article, please contact Jane Searing at firstname.lastname@example.org.