Now that Donald Trump has been sworn in as president, changes might be on the way for the tax code. But it’s unclear what will change and how much.
During the campaign, Trump brought his original tax plan more in line with House Speaker Paul Ryan’s “A Better Way” economic proposal. That should help the plan move through Congress more easily — but even though the same party controls the House, Senate and White House, it’s unlikely to pass as-is.
It’s never a good idea to make tax moves before there’s a law in place. However, it doesn’t hurt to consider changes that might be on the horizon. Here are some steps you may want to take — or not take — once we know more.
Hold off on buying a house
One argument for buying a house is that owners can claim many expenses, notably mortgage loan interest and real estate tax payments, as itemized tax deductions. Under the Trump plan, these deductions might lose value.
Trump has proposed dramatic increases in the standard deduction, which around 70% of filers use. The amounts would increase from $6,350 to $15,000 for single taxpayers and from $12,700 to $30,000 for married couples filing jointly. For the roughly 30% of taxpayers who itemize, Schedule A deductions would be capped at $100,000 for single taxpayers and $200,000 for married joint filers. (Ryan’s plan proposes removing the option to write off property tax payments altogether.)
Homeowners who don’t pay large amounts of mortgage interest or live in areas where property taxes are low might find Trump’s larger standard deduction more than covers the housing costs they itemized — and it would make tax filing easier. But it would also make buying less tempting from a tax perspective. And homeowners who have large mortgages and expensive properties could lose money with a deductions cap and the loss of the real estate tax write-off.
The proposed changes could affect your decision to buy. They might also lower demand for homes and cause property values to fall — so consider waiting until there’s clarity to house shop.
Delay charitable giving
Donations to IRS-approved nonprofits are tax deductible if you itemize. Higher-income taxpayers, however, might want to delay such charitable gifts in case Trump’s proposed limit on itemized deductions becomes law.
And because Trump didn’t mention keeping the deduction for charitable donations in his revised version of tax reform, the philanthropic community worries that he might think of it as an expendable tax loophole.
“Cuts, caps and limitations on the deduction mean less money for charities and those they serve. That can’t be what Mr. Trump intends,” Sandra Swirski, executive director of the Alliance for Charitable Reform, said in a statement following the release of the revised tax plan. “The charitable deduction is not a loophole, it’s a lifeline.”
Reassess your investment strategy
Trump wants to keep the current 0%, 15% and 20% tax rates for long-term capital gains, which apply to profits from assets held for more than a year. However, his three ordinary income tax brackets will shift taxpayers into higher capital gains brackets.
The current capital gains tax rates look like this:
|Current ordinary income tax bracket||Long-term capital gains tax rate||Single payers' affected income||Married joint filers' affected income|
|10%, 15%||0%||Up to $37,950||Up to $75,900|
|25%, 28%, 33%, 35%||15%||$37,951 to $418,400||$75,901 to $470,700|
|39.6%||20%||More than $418,400||More than $470,700|
Higher-income investors also face the 3.8% Affordable Care Act surtax.
Under the Trump investment tax plan, the three capital gains rates would apply as follows:
|Proposed ordinary income tax bracket||Long-term capital gains tax rate||Single payers' affected income||Married joint filers' affected income|
|12%||0%||Up to $37,500||Up to $75,000|
|25%||15%||$37,501 to $112,500||$75,001 to $225,000|
|33%||20%||More than $112,500||More than $225,000|
(Trump would eliminate the head of household filing status, moving these taxpayers to the single status.)
Twenty percent is lower than Trump’s proposed top ordinary income tax rate of 33%, but if you now pay 15% tax on long-term capital gains, the added 5% could be an unwelcome surprise.
However, if Ryan can convince the new president that “A Better Way” is indeed better, investors would be able to deduct 50% of their net capital gains, dividends, and interest income. This would mean tax rates of 6%, 12.5%, and 16.5% on such income, according to the speaker’s economic blueprint.
If Trump’s proposal does pass, you’ll still need to know its effective date. Past tax law changes have taken effect either on the date the bill was signed, a specific date cited in the legislation or made retroactive to a past date, generally the start of the tax year in which the measure became law.
If you’re planning on making any financial moves that might be affected by tax law changes, wait if you can. Acting too early could produce a costly tax bill.