On Thursday, the GOP released the draft for its planned tax reform legislation which would significantly alter the tax code with numerous changes. Predictably, President Trump and the GOP claim that the reform is a great idea, with the President tweeting that “the Republicans will hold strong and do what is right for America” while the Democrats call it a partisan monstrosity.
But what should actual professionals and financial experts take away from this reform plan? Clients will come to us asking how to best profit from the new plan, and some may even suggest that if the GOP simplifies the tax code that our services may no longer be needed. Here are some important things both within the tax code and to tell concerned clients.
- Accountants will still be necessary
The GOP has talked about simplifying our tax structure for years, and the House Ways and Means Committee claims that by eliminating deductions and other complexities, “an individual or family can file their taxes on a form as simple as a postcard.”
To put it bluntly, that is nonsense. Yes, certain measures such as increasing the standard deduction as well as removing various tax breaks and the unpopular Alternative Minimum Tax will make itemization less complicated.
But the tax code will also become more complicated in other ways. The GOP tax plan has a new concept called pass through income, which is a maximum rate of 25 percent and will affect practically every business in America. The tax bill has all sorts of complicated provisions to prevent wealthy Americans from classifying their income as pass through.
The tax code is not the sort of thing which can be simplified to a postcard with a simple reform plan, and accountants who fear losing their jobs to a simple tax code should understand that they have nothing to worry about.
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- Less tax brackets
The number of tax brackets is another example of how the GOP’s claims to simplify taxes is largely incorrect. The new tax plan according to CNBC will reduce the number of brackets from seven with rates of 10%, 15%, 25%, 28%, 33%, 35%, and 39.6% to four with rates of 12%, 25%, 35%, and 39.6%. The 25% bracket would start at $45,000 for single taxpayers and at $90,000 for a married couple.
The GOP has used the reduction in the number of tax brackets as an example of how they are simplifying the tax code. But for most taxpayers, looking up the number of tax payers is already easy. Once you know how much tax you are supposed to pay, it does not matter which bracket you are in.
- No 401(k) contribution limit reduction
In addition to detailing what is in the plan, accountants must also tell clients what is not in it. Recently, multiple news outlets reported that the GOP had considered dramatically slashing the amount Americans could put into a traditional 401(k) account from $18,000 to $2,400. That would have raised additional funds, but would have made it hard for accountants to help clients save with their retirement.
The media reports did trigger an uproar, so perhaps the GOP floated the idea only to back off in the face of public outrage. But Business Insider did report that both Trump and Ways and Means committee head Kevin Brady could make changes or use this issue for negotiating. This is an area which accountants must watch very carefully.
- Credit Elimination
The GOP may not be reducing the 401(k) contribution cap, but they are going to eliminate many deductions and credits to raise funds. Some of those credits include things such as developing orphan drugs, employer-provided child care, oil and gas production, and rehabilitating historic structures.
Removing some of these credits will certainly be politically controversial, but the key for accountants is that we must tell clients to get any credits they can now before they potentially vanish. This tax bill will go into effect by January 1 at the earliest, so it may be better to deal with your taxes before it goes into effect.
- This bill is not final
Clients may be panicking about what the media reports about this tax bill, but the most important thing to remind them is that it is merely preliminary. The Senate Finance Committee is working on its own version of tax reform which is expected to be unveiled next week along with the best inspirational quotes to motivate employees. Then the House and the Senate will have to work together to reconcile any differences, and then the fight for passage will begin. There is no guarantee the reform will pass at all when we look at how the GOP has failed to pass other legislative efforts.
In our current age of political and economic turmoil, your clients want a steady, knowledgeable hand they can trust. Pay attention to this tax bill and how it will change, and your accounting firm can be that hand.
Cost accountant with major focus in SAP/General Fund Enterprise Business System (GFEBS). Also, main functional inspector for accounting/finance audits for internal reviews as well as the Statement of Budgetary Resources audit initiative.