Friday, November 18, 2016


Many recent blog posts and online and print articles have talked about what to expect in terms of tax law changes in 2017 not that Dangerous Donald will, unfortunately, be our next President.  It is now my turn.
Unfortunately most of the posts and articles I have read assumed that tax reform legislation would reflect the Trump tax plan put forward during the campaign.
I firmly believe there will be tax reform legislation introduced, and probably passed, early in 2017 – but not what Trump proposed.  To be sure, almost nothing Trump promised during the campaign will actually happen – except for tax reform and the repeal and replacement of Obamacare.
And these will happen not because Trump promised them, but because the Republican leadership in Congress has wanted tax reform and the repeal of Obamacare for years, and will now be able to pass the necessary legislation based on the Party’s control of both houses without having to worry about a Presidential veto.
Nothing Trump proposed during the campaign was based on any real thought.  Just that whatever he would end up doing would be “great” and “the best”.  He basically spewed whatever he thought his audience wanted to hear pretty much off the top of his head, without any real details or actual plan.
Surprisingly his tax proposals actually had some detail – more than any of his other promises.  But, as I said in Monday’s BUZZ, the tax reform legislation that will be introduced will reflect the “Blueprint for Tax Reform” Paul Ryan first announced last summer.  The Trump plan contained much of what was originally in the Republican Blueprint proposal, as I am sure Trump stole most of his proposals from this plan.
Just as I expected, Jeanne Sahadi of CNNMoney told us on Wednesday, “Tax cuts are coming, but maybe not as big as Trump promised” -
But the tax cuts may not be quite as large as Trump has touted.
The reason: His tax plan is seen by experts and deficit hawks as just too expensive, potentially costing between $6 trillion and $7 trillion on the high end.”
And -
But Republican leaders in the House have already put forth their own tax reform blueprint, estimated to cost about half as much as Trump's.”
Here is what I expect will happen –
Tax rates will be reduced.  The Blueprint proposal consolidates the current seven tax brackets into three - 12%, 25%, and 33%.
The special capital gains and qualified dividends tax rates will change.  The Blueprint replaces the rates with a 50% exclusion of long-term capital gains and dividends, and adds interest to the list.  This makes this investment income effectively taxed at 6%, 12.5%, and 16.5%.  Everything old is new again – when I first started preparing tax returns back in the early 1970s there was a 50% exclusion of long-term capital gains allowed.   
The Standard Deduction will be increased, perhaps to 12,000 for singles, $24,000 for married couples filing jointly, and $18,000 for heads of household. 
The personal exemption may be eliminated, and replaced with separate credits for children and other dependents.
Schedule A will change drastically – with many of the items currently deductible eliminated.
The maximum tax rate on pass-through business income will be reduced to perhaps 25%.
The Alternative Minimum Tax (AMT) and perhaps the federal Estate Tax will be eliminated.  
The current tax benefits for education and retirement savings will be simplified and consolidated.  The Earned Income Credit will remain, possibly enhanced.
While I like and support many of these changes, this is not what I think should be done.
I believe that the current Tax Code should be totally shredded and rewritten from scratch.
The newly written Tax Code should -
·   Be simple – easy for everyone to understand.  Simplicity for simplicity’s sake. 
·   Be fair and equitable - treat all taxpayers equally.
·   Be consistent – treat specific conditions, situations, and activities, and maintain specific definitions and descriptions, the same in all instances.
·   Encourage savings, investment, and growth.
·   Index for inflation all allowable deductions and credits.
The new Code should not
·   Be used for social engineering, to redistribute income or wealth, or to deliver social welfare and other government benefits.
·   Encourage or discourage certain economic decisions (other than savings, investment, and growth), or provide exclusive benefits for specific industries, business activities, or classes of taxpayers.
·   Contain any refundable credits, or any phase-outs, exclusions or adjustments based on Adjusted Gross Income or Modified Adjusted Gross Income. 
·   Contain any “alternative” tax calculation systems (such as the current “Alternative Minimum Tax”).
·   Contain any temporary deductions, credits, benefits, or provisions.
Of course this is not going to happen.  I wrote to Paul Ryan, Orin Hatch, and Kevin Brady with the above tax reform recommendations last year and did not get any response whatsoever from any of them.
What I can say with almost certainty is there will be no change to tax law as it now exists for preparing and filing 2016 tax returns.
As for year-end tax planning, I would not take any different specific actions based on anticipated 2017 changes.  Follow traditional year-end strategies.  Tax rates will most likely go down and allowable deductions will be reduced for tax year 2017 – so defer income and accelerate deductions. 
So there you have my take on what to expect for 2017.  Any thoughts or comments?

No comments: