Alright so what is up with the tax reform proposed by the president and being considered by Congress?
Well as in any legislation there will be winners and losers; or, said another way – those who smile and those who frown. The reform package presented by the president was vague and lacked details, which were left to Congress to fill in the specifics. And remember the reduction in taxes must be offset with additional revenue otherwise the national debt will continue to climb; so, all deductions, credits and tax deferral arrangements are on the table to produce the revenue necessary to fund the tax rate cuts. I have scanned the internet looking for articles reflecting the uncertain effect of the tax reform package as it is being drafted and attached five which I believe are critical to our understanding.
First the summary of winners and losers: while this Fox News article is brief and short on details it does outline the winners and losers:
Winners are corporations with high tax rates, heirs to large estates, those who do their own taxes, high income individuals, and low income individuals.
Losers are thought to be taxpayers in high-tax states, accountants, the national debt, social programs and those who hoped for more details.
The CNN contributor Jeanne Sahadi discusses the complexity and difficulty of eliminating the state income tax and property tax deductions. A lot of oxen are gored on this one, not the least of which is homebuilders who have already voiced their displeasure.
The Heritage Foundation taxes a more conservative look at why the state and local tax deduction should be eliminated because it encourages states to raise taxes with little citizen push-back since their tax cost is deductible. (While I personally disagree with the premise that states would lower taxes if there were no deduction, I will save that conversation for later if the idea survives).
Fox business contributor Brian Schwartz writes about the Republicans decade long fight to eliminate what they call the “Death Tax”. Now here I will make clear my concern: if the estate tax is eliminated for the .02% who pay it – what about the step-up-basis benefit for us in the 99.8%. The step-up in basis rule lets all heirs adjust the decedent’s cost basis to market value on date of death. For example: if the decedent has 10,000 shares of OG&E stock purchased for $50,000, that is worth $350,000 on date of death, the heirs’ basis in a sale is $350,000 – effectively saving tax on $300,000 to the heirs’ benefit. With no estate tax on the few there is no regulation allowing the basis adjustment.
Finally, the possibility that the reform may include a limitation on the amount of 401(k) and other retirement plan contributions that can be deducted is addressed by Jim Cramer. Cramer clearly rejects this idea as a dead on arrival