The tax revamping proposed by the Trump Administration certainly grabbed headlines. However, many who have been asking for meaningful tax simplification might now be sorry that they asked. These proposals will be a good example of “be careful what you ask for”, as many favorite deductions and exclusions are slated to disappear. Who knows how this will ultimately finish out, as the legislative process works through hammering out what ultimately will be a final version. However, a prudent taxpayer can do a couple things to help ease any anticipated pain.
Example: If the mortgage interest deduction might be limited to only interest on $500k in debt, you probably don’t want to start house hunting right now for that million dollar home unless you plan on putting down at least 50%. The deduction for state income taxes and medical expenses is proposed to go away. If you have discretion over when to pay these, you might consider paying them in 2017 before a repeal takes effect. But maybe not, depending on your individual tax situation. These things may do you no good in 2017 either.
Another example of things you can do to change your tax profile is not getting divorced. Right now the tax code actually encourages the opposite, as there is still a marriage penalty built into the rate structure, and often times two single filers will pay less tax than a married couple with the same incomes. In addition, Alimony payments are fully deductible against gross income, making it easier to support a former spouse. But that could be changing. With a contraction of the rate brackets the marriage penalty could be reduced for many. And that payment to the Ex? It’s proposed to be nondeductible, making it much more expensive for people getting divorced in the future.
There are too many provisions that are on the cutting board to go over them all here, but let it suffice to say that a projection of your 2017 tax situation before it is cast in stone is an important starting point. This will enable you to make some decisions on how or if to respond to pending law changes.