Looking Through The Crystal Ball at Tax Reform
With every new administration comes a new approach to taxation and changes to deductions and credits. The Trump administration has promised tax reform since the early campaign days, and his latest tax reform legislation does just that. However, instead of highlighting what the legislation would alter if its adopted, this article focuses on what is likely to remain the same.
With the latest administration in office, there may be changes to the tax breaks you have historically claimed on your tax returns. While it's still unclear what tax laws will change, USA Today recently reported there are five tax breaks that remain unaltered in the current version of tax reform legislation:
Mortgage Interest Deduction
Charitable Contributions Deduction
IRA Contribution Deduction
Premium Tax Credit
HSA Contribution Deduction
Let’s take a more detailed look at each to get a better understanding of how you may be affected, relevance to the taxpayer, and how these deductions might help:
Mortgage Interest Deduction: As its name reflects, the mortgage interest deduction is available to those who pay a mortgage and itemize their deductions. While this deduction would not change, the proposed reforms to the tax laws may not leave enough itemized deductions intact to make itemization of deductions a viable option for most folks. Combine fewer deductions with raising the amount of the standard deduction, and relatively few taxpayers may bother itemizing under a revised system. As a result, even though you might continue to qualify for a mortgage interest deduction, it may not make sense to take it because the standard deduction would be a better deal.
Charitable Contributions Deduction: A certain percentage of charitable contributions are deductible under the current tax code and like the Mortgage Interest Deduction, this looks like it won’t change in the tax reform package. Also like the mortgage interest deduction, charitable contributions are only available if you itemize your deductions.
IRA Contribution Deduction: Contributions to IRAs are deductible under certain circumstances and at present, this non-itemized deduction would remain unchanged.
Premium Tax Credit: Unsurprisingly, this credit is tied to the Affordable Care Act, which is very much unresolved at the present time. This credit will still exist for low and moderate-income taxpayers who buy private health insurance, but changes are expected under the new plan. The proposed new version of the Premium Tax Credit would make it available to a wider range of income levels and the credit amount would increase with age, rather than with need. Additionally, the new premium tax credit won’t require taxpayers to buy health insurance policies on the ACA marketplace, as the current tax credit does.
HSA Contribution Deduction: This is part of the tax reform plan that appears to be expanding in the healthcare reform package. If approved, annual contribution limits would increase to nearly double what they are right now. HSAs would become a payment option for every health insurance policy, instead of just for special HSA-enabled plans. Lastly, the healthcare reform package would expand what qualifies as medical expenses for the purposes of HSA spending. If this tax reform legislation passes as-is, it would make sense to increase HSA contributions.
No one has a crystal ball to determine exactly what will be changed with the tax reform.
Of interest – and certainly water cooler discussion – is how these changes will impact you as a taxpayer, and when the changes will become effective. The only certainty right now is that changes will come, and it’s important for you to be informed.
Source: USA Today ‘5 tax breaks President Trump won't kill’