The season that brings joy to many accountants and dread for some average folks earning an income is almost upon us once again: tax season. However, unlike any new year in recent memory, this tax season brings with it a cloud of uncertainty as an expansive new set of tax laws and code changes winds its way through the U.S. legislature. Prior to the 2016 presidential election, Donald Trump and the Republican Party made taxes a central focus of their campaigns and policies, pledging to make a new tax reform bill a top priority within the new president's first year in office.
"Taxpayers don't need to scramble to adapt to any coming tax changes."
Starting late in the summer of 2017, those promises finally began to materialize in Congress. The Republican majority leadership in both the House of Representatives and the Senate, under pressure from a year-end deadline imposed by the Trump administration, has worked and continues to work at a feverish pace crafting a bevy of new tax laws. As of the first full week of December, each half of Congress had approved its own tax reform bill, but lawmakers still faced various legislative demands before it could be passed along to President Trump.
Whether or not the tax bill, now known as the Tax Cuts and Jobs Act, is actually passed before the end of 2017, and regardless of its contents, American taxpayers don't need to scramble to prepare for it as much as their elected representatives in Washington, D.C. - any changes to the tax code won't really be noticeable until taxpayers file their personal income returns in 2019. However, the provisions at work to decide the outcome of those filings will take effect starting Jan. 1, assuming they are signed into law before that point. That means taxpayers might need to get up to speed with how the tax bill is evolving and what stands to change in the meantime.
What is the chance of the tax bill passing?
Most political experts, including congressional representatives themselves, are optimistic that they will succeed in passing some sort of tax bill before the year is out. While it might be a fool's errand to assign a numerical value to the odds of any event occurring, particularly when it comes to politics, many agree that the urgency of this push to pass a bill put the chances of a bill passing higher than 50 percent, according to CNBC. A Business Insider report from a week later quoted one analyst who pegged the odds as high as 80 percent, and noted that Wall Street investors were responding in kind. Financial indexes that track most of the U.S. stock market like the S&P 500 have seen sizable gains in the last three months, roughly coinciding with the tax bill's progress.
What will the tax bill include?
The question carrying a greater degree of uncertainty isn't if a tax bill will pass, but specifically what will make it to the final version of the Tax Cuts and Jobs Act signed by the president. This has much to do with the unorthodox methods Congress is utilizing to speed up the process and realize a higher chance of success. As The New York Times explained, the House and Senate each created and voted on their own versions of the tax bill. Now that each chamber has approved its own bill, Congress must reconcile the small yet numerous differences between the two before crafting a single piece of legislation for President Trump to sign.
This makes it difficult to know precisely which measures will be kept in place and which end up on the cutting room floor, but for now, both bills have a few major points in common:
- The number of personal income tax brackets would be reduced.
- The standard deduction for personal income taxes would double, but many itemized deductions would be reduced or eliminated.
- The highest corporate income tax bracket would fall to 20 percent from 35 percent.
- Certain organizations known as "pass-through businesses" could have their income taxed at the new, lower corporate rate, rather than treating that income as personal income as has been the case.
How should taxpayers prepare?
While there are many more details on these and other provisions of the Tax Cuts and Jobs Act, and each of them could change drastically before being signed into law, taxpayers would do well to prepare for the reforms as best they can now. According to financial advisors who spoke to CNBC, no one should take any dramatic steps to alter their tax status based on the bill before knowing exactly what will become law. That means continuing to make ample contributions to tax-advantaged retirement accounts and offsetting liabilities through deductions in place now.
Once the bill does become law, however, it's time to check in with your advisor or financial planner to understand if and how the new rules will effect the returns you file in 2019. One financial professional who spoke to CNBC said she would be taking a close look at how her clients accelerated or deferred certain income to take advantage of deductions, or prepare for their elimination. Others noted that while a case could be made for certain last-minute changes if a bill is finalized in 2017, those would be rare and should only be performed under the advice of a qualified tax specialist.
Reach out to your local Landmark Bank for any more questions you might have regarding your tax situation and getting dependable financial advice.
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