04 May Trump’s tax plan: What you should know
Q. Now that we know a little about Trump’s tax plan, are there changes we should make yet? Or do we have to wait until the plan is passed?
A. Nothing is a sure thing until we see legislation pass.
The Trump plan proposes several changes that will impact individuals and business owners.
First, it would simplify the tax brackets from 7 to 3. Individuals earning less than $25,000, or families earning less than $50,000, would pay no income tax, said Jerry Lynch, a certified financial planner with JFL Total Wealth Management in Boonton.
For business owners, the highest tax rate would be 15 percent.
There are two important changes for New Jerseyans.
“There would be an elimination of most deductions and personal exemptions,” Lynch said. “This has a very negative impact on New Jersey residents as our New Jersey income and property taxes are very high.”
It would also eliminate the Alternative Minimum Tax (AMT), which Lynch said hits many people in New Jersey.
The new changes would also eliminate the estate tax — also called the death tax — which currently has a federal exemption of $5.49 million. Lynch said this will have no impact on 99 percent of the population.
And finally, Lynch said, the plan would eliminate the Obamacare investment income surcharge of 3.8 percent.
So what does it all mean to you?
Lynch said one action item would be a Roth conversion because you’d have until Oct. 15 of 2018 to ‘recharacterize’ it if the expected changes don’t happen.
“This is basically the IRS version of a ‘do-over,'” he said. “If the tax rates do not come down or for whatever reason it doesn’t make sense, recharacterization give you the ability to make it like you never converted to a Roth in the first place. This is a tremendous tax planning tool.”
But generally, when it comes to tax planning, Lynch said he has concerns because most people don’t understand taxes.
“They do not understand what they pay and why, nor what they can do to reduce their liability,” he said. “The tax rates almost don’t matter, it is what can you deduct that matters.”
That’s why, he said, if the plan reduces or eliminates what an individual can deduct on big ticket items such as property taxes and mortgages, then you have effectively raised the tax rate.
Lynch said for him personally, because his business is a LLC, his income would only be taxed at 15 percent. He says while that would be great, he doesn’t think it seems right because it’s so low.
Now the big question is what, if anything, will happen with taxes.
“If Trump could not get his health care bill through Congress with a Republican Congress, getting this approved will be equally challenging,” he said, noting there’s a good chance any changes could look very different when legislation is actually passed.
So much for crystal balls, and you’ll have to wait and see with the rest of the country.
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This story was first published in May 2017.NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.