Proposed "tax reform"

[kathyc2]

Am I the only one dreading years of rev procs, interpretations, etc. determining what is "business income" if this goes through?

On, another note, wouldn't it be great if everyone voting on/signing the bill had to accurately prepare a few tax returns based on the legislation before they can vote/sign?

[David1980]

I don't think enough people in congress can agree on what exactly reform should look like that there's any chance of it passing. That is, I'll worry about it once it's the law.

[Burke]

On, another note, wouldn't it be great if everyone voting on/signing the bill had to accurately prepare a few tax returns based on the legislation before they can vote/sign?

Great idea. Like they would do it by hand....HA! It is amazing to me that they think shrinking brackets to 3 is "simplification." And can you see anyone filing their tax return on a postcard? Just where would they put the SSN so it wouldn't be available to anyone handling the mail?

[Snaggletooth]

Bracket Simplification

Reducing the brackets from 7 to 3 does absolutely nothing to bring about simplification. How many hours (or even minutes) do you spend looking up a client's tax by going through ALL the brackets? Ridiculous, but it makes an effective soundbyte to the ignorant.

Not going to spend a lot of time discussing something that won't happen, BUT...Keeping the mortgage deduction and contributions but at the same time doubling the standard deduction has the effect of negating the benefit of deducting interest and charity. Speaking for myself, maybe 5-10% of my clientele has itemized deductions over $24,000. The rest of them are able to get some benefit by deducting property taxes, mortgage interest, and charity IF over $12,600. Raising the std deduction means there is absolutely zero benefit to these people who are paying interest on their home.

Horrified taxpayers who are going to "lose" deductions for property and state taxes, should be somewhat consoled by the fact that the higher income people have been losing tax deductions via the AMT anyway. Lower income people will have their deduction for taxes washed away by the $24K std deduction.

[Uncle Sam]

Nothing was said regarding the medical deductions where in serious cases can wipe out a family's lifetime savings.
By doubling the standard deduction - it becomes a disincentive to own your own home, as the real estate taxes won't become a valuable deduction anymore.
And- without the ability to get a charitable donation deduction - loses the incentive to contribute to valuable exempt causes- so when disaster strikes - Red Cross and medical research foundations won't have adequate funds to relieve the needy - such as Harvey, Irma, and Maria. Also - religious institutions will lose their funding.
And by post-carding a tax return - it will consolidate investment strategies over an inter-generational century - based on different tax rates - and condense them into an oversimplified system to satisfy the gullible ignorant public who doesn't understand the subtle differences.

[New York Enrolled Agent]

One seemingly overlooked point on doubling the standard deduction is that there will no longer be any deductions for personal exemptions. Thus, the "double" may not be as good as it might sound to some.

[kathyc2]

My understanding is that personal exemptions for TP and spouse goes away with "doubling" but exemption for dependents stays. As someone who likes to be precise with numbers drives me crazy that 12,000 is "double" 6,350.

The chart on front of TTB makes it easy to explain to clients how the layers of taxes work.

Less than 1/2 of my clients itemize, and that is not the complicated part of prep. How many times do we see questions here regarding itemizing?

Burke, I thought the same thing about SSN's exposed on a postcard. The vast majority of self prepared use something like Turbo Tax would they really care about the number of pages?

The specifics are light at this point, but I've identified several clients who would pay more based on what we know at this point.

I've found a couple things to be true: when they say they are going to simplify it pretty much guarantees it will be more complicated (what is business income going to mean?), and it will take Congress/IRS years to catch up with legal ways people can find around new "rules".

[FEDUKE404]

Thoughts on proposed tax changes

It's way too early for any meaningful 2017+ tax facts to be known, but here are a few of my thoughts based upon what we are hearing:

Assume the "state and local income taxes" will also include real/personal property taxes?

Probably somewhere just south of 50% of the US "residers" have zero income tax liability in the first place. Will the government come up with more hand-outs to quell their revolt as their "tax reduction"?

The large standard deduction can, indeed, work against charitable giving because. . .one's taxes might not even change as a result of routine contributions.

I laugh at "postcard filing." In recent years the IRS has released thousands of employees and closed regional processing centers because of the widespread use of. . .ding! ding!. . .electronic filing.

What about (excessive) medical deductions? My children are adults, and the mortgage is paid off. But I have close to $100k of medical expenses annually. First there was the 7.5% floor, then the 10% floor, and now apparently the 100% floor. NOT good! (And RMDs are just around the corner. . .)

Many of the extra Obamacare taxes are based on income only. . .deductions are totally irrelevant. And don't even get me started on the robbery known as IRMAA !!

FE

[New York Enrolled Agent]

My understanding is that personal exemptions for TP and spouse goes away with "doubling" but exemption for dependents stays.

I've found a couple things to be true: when they say they are going to simplify it pretty much guarantees it will be more complicated (what is business income going to mean?), and it will take Congress/IRS years to catch up with legal ways people can find around new "rules".

Kathy - I agree with your final point but I don't believe there will be ANY personal exemptions. There are no details but to soften the elimination of the exemption there is supposed to be an enhanced child credit and perhaps a credit for non-child dependents.

There will be some "tipping points" for large families who would pay more. As others point out there is a long road before any of this is presented with details and any final legislation.

[Burke]

They would do well to tackle this in stages. There is no way they can do comprehensive reform by the end of the year. Then each point can be debated singly. Reducing Corp rates and simultaneously changing depreciation to expensing means a severe drop in income to the Treasury which I don't see it can sustain. The notion this will promote growth in GDP and thereby negate all the reduction in income is laughable. We've been down this road before.

[kathyc2]

Kathy - I agree with your final point but I don't believe there will be ANY personal exemptions. There are no details but to soften the elimination of the exemption there is supposed to be an enhanced child credit and perhaps a credit for non-child dependents.

There will be some "tipping points" for large families who would pay more. As others point out there is a long road before any of this is presented with details and any final legislation.

You are correct. At one part of the pdf it just talks about taxpayer and spouse deduction, but in another part it also includes the dependents with the "enhanced". The pdf at the end of this article has the most detail I've seen yet. http://www.businessinsider.com/trump...ns-cuts-2017-9

[TaxGuyBill]

Then each point can be debated singly.

LOL. Wishful thinking. :-)

[dtlee]

On, another note, wouldn't it be great if everyone voting on/signing the bill had to accurately prepare a few tax returns based on the legislation before they can vote/sign?

Great idea. Like they would do it by hand....HA!

The authors of this bill are so out of touch that they apparently have no idea how the tax system works (and expect the average worker to understand even less) nor how people prepare their taxes. A couple of snippets from their UNIFIED FRAMEWORK FOR FIXING OUR BROKEN TAX CODE release:

...give American workers a pay raise by allowing them to keep more of their hard-earned paychecks.

I don't think this is intended to say that every worker ultimately gets a tax decrease, so much as to say that every worker will get a larger paycheck. In other words, by eliminating personal exemptions (i.e., consolidating them into the standard deduction), they will likely make each withholding allowance equal to zero. The larger standard deduction will force even people trying to withhold the most to withhold the same as someone wanting to withhold far less. Even though the standard deduction will be larger, there are individuals who work 2, 3 or more jobs who will have a hard time withholding enough. This has long been a problem with New York State withholding and will now be a national problem. Tax simplification!

This framework substantially simplifies the tax code by repealing the existing individual AMT, which requires taxpayers to do their taxes twice.

I had a very old skill. At one time (a long time ago in a galaxy far, far away), I was one of the few individuals in our office who understood the Alternative Minimum Tax and knew what each line on Form 6251 represented and how to compute most (definitely not all) of them by hand. While the Alternative Minimum Tax is a separate tax system and really does compute the taxes two different ways, it is administered as an add-on tax on Form 6251 (and would likely be easier to understand if it were computed as a separate tax than as a bunch of adjustments). How many taxpayers even understand this? Outside of a classroom (and not any recent classroom), I have never actually seen anyone "do their taxes twice" as they describe since the form and instructions obfuscate this by asking for a series of alternative minimum tax adjustments and preferences and even then, it would be rare for anyone subject to this tax to compute the add-on amount without computer software.

How can anyone possibly be opposed to this perfect solution? Everyone wants a bigger paycheck. No one wants to do their taxes twice!

Hopefully, we will get some true details soon and hopefully someone knowledgeable will digest it fairly so that the average Joe will understand the impact (rather than simply rallying around a bunch of well-crafted sound bites).

[dtlee]

Less than 1/2 of my clients itemize, and that is not the complicated part of prep. How many times do we see questions here regarding itemizing?

Excellent point. If I had to vote for the most common overly complicated part of the code, I would vote for the American Opportunity Credit.
I am always discussing (perhaps debating is a better word) how many years count, which expenses count, which other tax benefits can be applied to other costs to increase it, which education benefits are allowed to double-dip, when a dependent is or is not allowed to claim the credit, what the rules for the refundable portion are and how they differ from the last rule, when courses taken in high school might count, when an otherwise eligible graduate school expense might count, etc. Take away this credit and you simplify things a lot (especially when you consider that we are subject to the due diligence penalties).

I've found a couple things to be true: when they say they are going to simplify it pretty much guarantees it will be more complicated (what is business income going to mean?), and it will take Congress/IRS years to catch up with legal ways people can find around new "rules".

Back in 2004, the IRS asked Congress to create a "Uniform Definition of a Child" in order to simplify the definition of a Qualifying Child for the five major tax benefits. Congress responded with the Working Families Tax Relief Act of 2004. This year, nearly 13 years later, the IRS has finally come up with the 74-page proposed regulations based on that simplification.

Here, in case anyone wants to see how simple this became:

https://s3.amazonaws.com/public-inspection.federalregister.gov/2017-01056.pdf

[kathyc2]

Exactly! If Congress truly cared about simplifying, they would have staff browsing message boards such as this and Tubro Tax to determine what items cause confusion. We all know that the 7 brackets are not where the problems are!

I can't find the article now, but I had read one where Paul Ryan indicated lower corporate rates would eliminate the DPAD which, according to him, no one understands. Maybe they could have considered that before they passed DPAD???