Well, at least the basic outline of what Trump would like to change in the Tax code is out, and for many Americans, it’s very good news. But we say that tongue in cheek.
It’s good news if you hire or become a pro-active tax planner.
Why do we say that you have to be a tax planner for this to be good news?
What Trump is saying is he’s going to substantially cut taxes for businesses and for regular taxpayers. He’s going to “simplify” the tax code. Nowhere in the word simplify is there even a hint of lower personal income tax for most, although doubling the personal exemption would be a tax coup; for the working poor.
Currently we already have a 10% rate and we already have a 25% rate, so simplification simply means the 15% rate that was in-between 10% and 25% in the current tax system goes away. What that means for average Americans is if they are just over 10%, they had enjoyed a fairly substantial stretch of income that was only taxed at 15%; and instead in the proposed plan, as soon as you leave the 10% tax bracket, you will immediately be paying 25%, not 15%.
For many Americans, it means a tax increase of a fairly substantial amount.
He also wants to “simplify” schedule A by taking away deductions, such as for many Americans that have issues like “unreimbursed work expenses”. Many sales people, construction workers, a lot of W-2 employees that are without a company vehicle but asked to go to different locations and wear certain kinds of clothes like nurses, airline stewardesses etc. will now simply not be able to take those deductions. The only deductions he plans on leaving in the new schedule A are home mortgage interest and charitable deductions.
Medical expenses, property taxes, state income taxes and excise taxes, all currently deductible on schedule A, are to be done away with.
Now, the devil is in the details, so maybe some of these things get left alone or put back. After all, at this point, it’s just a proposal with no details; but Americans need to realize that he’s cutting taxes for businesses not people. What it means for most Americans that have had a sole proprietor or schedule C businesses on their personal 1040, they’re now going to have to incorporate, pay payroll taxes, FICA and FUTA taxes, and learn everything there is to learn about the next level of business, in order to continue to take normal deductions and pay a reasonable rate of tax.
That’s not necessarily a bad thing for the tax and accounting industries. It means more work for us in explaining to people how they incorporate, when they incorporate, how much they should pay themselves under payroll, and the myriad of new ways of doing the accounting for their businesses that they’ll need to learn.
Thumbs-up for Trump wanting to lower the tax rates for corporations to make us more competitive in the free world; but hey folks, don’t be confused by simplification of the tax code for people.
For the common person, it means stepping up your education. It means making a next-level effort in and around planning your outcomes in advance. For our firm, it’s a bump in business that we welcome. But America, this is not lowering taxes for people. You need to come in, and we need to talk and change some things just to keep moving sideways.