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2017: Tax Update & Proposed ChangesSubmitted by Townsend Asset Management Corp. on June 2nd, 2017
With the 2016 tax filing deadline in our rear view mirror, we are looking forward to 2017 and offering tax planning advice to our clients. 2017 dawned with two main changes in tax filing.
The first pertains to adjustments in filing deadlines for tax forms as noted in the chart below:
The second major change was the continuing vigilance of the IRS and State Departments of Revenue to crack down on fraud. Many of you may have been asked by your tax preparers to provide identification information such as a driver's license or passport number in order to file electronically. In addition, if there was a difference of 10% in your refund, you may have received an automated letter from the IRS asking you to confirm personal information such as mailing addresses, etc.
Proposed Changes in the Tax Code
There has been a lot of buzz in Washington regarding changes in the tax code proposed by the new administration. Although it is anyone's guess how far these proposals will advance, it's useful to be aware of some of the major tenets.
1. Reduction in the number of tax brackets from seven to four. As this chart illustrates, the top bracket is taxed at 25% which is down from the highest bracket in 2016 of 39.6%.
2. The elimination of the 3.8% Medicare tax which is now currently assessed on "net investment income", when your "modified adjusted gross income" exceeds $200,000 (for a single taxpayer) or $250,000 (for married taxpayers.)
3. Getting rid of the Alternative Minimum Tax (AMT). This is an extra tax imposed on certain higher income individuals which increases the amount of income taxed by reducing the amount of allowed deductions. Introduced in 1966, the AMT was a method to ensure that a handful of high earners didn't use deductions to escape paying taxes, but it has grown to now impact millions of taxpayers.
4. Remove itemized deduction for state and local taxes. The standard deduction would be more than doubled.
5. Eliminate estate taxes, but this could be offset by also getting rid of "step-up in basis". "Step-up in basis" means that a person inheriting an asset gets to use the value of the asset at the time of the decedent's death as the "tax basis" in the asset if it is later sold, instead of having to use the decedent's original tax basis.
6. Cut the business tax rate. The highest current rate of 35% would be lowered to 15%.
Any of these changes in the tax code will most certainly provoke a lively national debate and likely require negotiation and compromise.
Gerald A. Townsend, CPA/PFS/ABV, CFP®, CFA®, CMT is president of Townsend Asset Management Corp., a registered investment advisory firm located in Raleigh, North Carolina. Email: Gerald@AssetMgr.com