How to Prepare for Trump's Proposed Tax Changes
Implications for home buyers, the charitably inclined and investors
(This article previously appeared on NerdWallet.com.)
Now that Donald Trump is president, changes might be on the way for the tax code. But it's unclear exactly what will change and by 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 percent 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. But for the roughly 30 percent of taxpayers who itemize, Schedule A deductions (like mortgage interest and property taxes) 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 that Trump's larger standard deduction more than covers the housing costs they itemized in the past — and would make tax filing easier. But it would also make buying a home less tempting from a tax perspective. And homeowners who have large mortgages and expensive properties could lose money with a deductions cap as well as 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.
Consider Delaying Charitable Giving
Donations to Internal Revenue Service-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 percent, 15 percent and 20 percent 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.
Currently, if you're in the 10 or 15 percent income tax bracket, your long-term capital gains rate is 0 percent; if you're in the 25, 28, 33 or 35 percent bracket, your capital gains rates is 15 percent and if you're in the top 39.6 percent bracket, your long-term capital gains tax rate is 20 percent. (Higher-income investors also face the 3.8 percent Affordable Care Act surtax.)
Under the Trump investment tax plan, if you were in the 12 percent income tax bracket, you'd owe a 0 percent long-term capital gains tax rate; if you were in the 25 percent bracket, your capital gains rate would be 15 percent and if you were in the 33 percent bracket, your capital gains rate would be 20 percent.
The 20 percent top capital gains rate is lower than Trump's proposed top ordinary income tax rate of 33 percent, but if you now pay 15 percent tax on long-term capital gains, the added 5 percentage points could be an unwelcome surprise.
However, if Ryan can convince the president that "A Better Way" is indeed better, investors would be able to deduct 50 percent of their net capital gains, dividends and interest income. This would mean tax rates of 6 percent, 12.5 percent and 16.5 percent 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.
Also from NerdWallet:
- NerdWallet's Federal Tax Calculator
- The Fastest Way to Get Your Tax Refund
- 10 Tax Forms You Need to Know Before You File