By: Jason Schneider, CPA
As tax season has progressed, one of the questions that has repeatedly been asked is “What’s President Trump going to do with taxes”? The answer to that question is easy…we’re not sure yet. We know that tax reform is on the horizon, we just don’t know what it will ultimately look like.
From an individual standpoint, President Trump and the GOP plans call for reducing the number of tax brackets from seven to three with the maximum rate being 33%. Additionally, there is a lot of talk about what to do with the standard and itemized deductions and both plans call for increasing the standard deduction while eliminating certain itemized deductions. However, this is where the proposals start to differ and the discussion may get pretty complicated. There is a reason why we have not had significant tax reform in many years and that’s because we all have competing interests. The housing industry will fight vigorously against any proposal that includes a reduction of property tax or mortgage interest deductibility, while non-profit organizations and philanthropists will take a stand against any policy that limits our ability to deduct charitable contributions.
From a business standpoint, it appears that tax reform will take place in the corporate tax rate for traditional C-corporations and in the tax rate on flow through income for partnerships, LLCs and S-Corporations. While we don’t yet know what that tax rate will be, it’s widely believed that the rate will be significantly lower than the highest individual rates and will flow through at that corporate rate on the personal income tax return. With this being the case, an individual taxpayer in the 25% tax bracket could potentially be paying tax at multiple rates on their income tax return.
The application of the corporate tax rates and how they will affect income that flows through to individual returns creates several tax planning opportunities in how that income is structured. Because of the uncertainty and the various tax planning strategies, it will be more important than ever to remain in contact with your CPA throughout the year as some of these pieces of tax reform start to become reality. The tax industry as a whole is still unsure of what the final tax reform package will look like. But one thing is certain, there will be change and keeping open lines of communication with your CPA will be crucial in order to capitalize on that change as it happens.
For more information call Osborne Rincon CPAs at 760-777-9805.