What Does the Tax Reform Really Mean?
There's a lot of news coverage on the proposed tax reform, and I wanted to offer some insight from a tax preparer's point of view.
Standard Deduction – This proposed change provides for doubling the standard deduction. The effect of this is that many people will no longer need to itemize deductions on their federal return. One twist though- taxpayers will still be able to itemize on their state return since that amount is not likely going to change for now.
Loss of Exemptions - Taxpayers will no longer get an exemption for themselves and their dependents. This pretty much offsets the benefit of the doubled standard deduction. This obviously hurts those with larger families.
Consolidation of Tax Brackets – The consolidation of tax brackets will affect the different income levels in different ways. There are a lot of moving parts in this one. The biggest impact from this comes from the new 12% bracket which applies to the first $90,000 of taxable income for married filing jointly. It is safe to say that it will reduce taxes for most everyone making under $200,000 a year.
Alternative Minimum Tax – This should make everyone happy. This is the one where the IRS takes away deductions from people that make over a certain amount. I never liked it and none of my client s do either. While this benefits only the higher income taxpayers, good riddance!
Possible Big Loser – Unfortunately, charities might be the biggest loser of all with what will be effectively be the loss of itemized deductions for many due to the doubling of the standard deduction. The financial incentive to donate for a tax break will be eliminated for most people. With that in mind, please do what you can to support for the non-profits that you care about.
Stay tuned- I'll be writing more as this evolves and offer a few examples to see how this might impact you.