During election time, we often hear “I’m going to lower taxes” over and over… is it really going to happen this time? Probably.
The difference is that in 2017, along with a Republican president, the Republicans have majorities in both the House and the Senate. The Republican’s House majority is their second largest since the 1920s. Pressures for tax reform have been building for some time and with the Republicans’ eye on the prize, the likelihood of major tax reform occurring this time around is arguably the highest it’s been in the last 30 years.
Are we getting ahead of ourselves?
There are many things that can and have derailed tax reform. Will Democratic Senators join Republican Senators to reach the 60 votes needed to stop a filibuster? Or will Republicans accomplish tax law changes through the budget reconciliation process? This would mean only 51 votes would be needed and there are now 52 Republican seats in the Senate. However, there could be disagreements among the Republicans because even if they have similar views, everyone has different priorities. And on top of that, tax reform is hard!
Okay…but when could this happen?
Realistically speaking, after the inauguration there will likely be a few months of excitement prior to the process making any headway. However, tax reform is a top priority for both the legislative and executive branches in 2017. The momentum is building and it could expedite the process to just a few months.
Will I be affected?
Yes! Both the House and the President are on a path toward change. The main areas affect both individuals and businesses, and the overall approach is to “lower the rates and broaden the base,” meaning that although many rates are decreased, there are many deductions that are no longer allowed, which can result in zero tax benefits (or potentially even more tax liability) for a lot of taxpayers.
Highlights of the current proposals are:
- Corporate business tax rates lowered from the current highest rate of 35 percent to 15/20 percent.
- For individuals with partnership and S Corporation pass-through income, elective flat 15 percent rate on profits that are kept by the business.
- Eliminate most corporate tax expenditures – Section 199 domestic activities production deduction, the LIFO inventory method and the installment sale method used to defer reporting capital gains until the related cash is received.
- The top rate for individuals could go from 39.6 percent to 33 percent – note that although lowering tax rates sound appealing, there is a large group of individuals that would not experience a rate benefit. Specifically single filers within $37,650-$91,150 and joint filers within $75,300-$151,900 will have no rate change in this proposal.
- Limitation of itemized deductions – this will decrease the benefit of lowered tax rates.
- Repeal the 3.8 percent Net Investment Income Tax that applies to individuals with capital gains, interest, dividend income and passive activities.
- Repeal the Alternative Minimum Tax.
Is there anything I can do now?
With any major tax changes there is significant opportunity for looking ahead and planning. Here are a few things you can do:
Assuming changes do not occur until after 1/1/18, be aggressive with tax deductions while tax rates are higher. Take advantage of accelerated depreciation. Maximize your retirement contributions to lower your tax liability.
Read the House GOP blueprint, focus on areas that are concerning to your industry or practice. Reach out to others in your industry for discussion and potential planning.
Consider how current plans for your business could be affected by proposals in the House GOP blueprint.
Lastly, reach out to your professional advisors for help on potential planning.
There are no certainties when it comes to promises from electoral candidates. However, it is clear that changes are coming our way.
Kelli Loo is a manager at Opsahl Dawson. Her practice focuses on helping businesses and their owners. She can be reached at 360.737.8007.