With the Trump administration and its Republican allies in Congress rushing to pass at least one major piece of legislation by the end of the year, it’s time to take a serious look and how the GOP-led tax reform bill can change how you manage your own finances.
Tax reform is a complex topic due to the myriad of different areas of your finances the changes may impact. By understanding the proposed adjustments to America’s tax code, you can determine how the changes will impact your personal finances and investments.
Simple Tax Codes
A key reform that may impact Americans and their families is the adjustments to the tax code itself. President Trump recommended an adjustment to simplify the code and reduce the number of tax brackets. The goal of shrinking the number of tax brackets ensures that Americans are not facing unnecessarily complex systems and codes.
The recommended reforms passed by the House of Representatives also focus on changes to the deductions and exemptions applied to an individual’s taxes. Trump’s tax plan recommends a higher standard deduction for each member of the family. It also provides double the child tax credit, which may help families with children.
Exemptions are changing to include fewer situations. The goal of changing exemptions in the tax code is limiting the number of loopholes available for individuals or groups to exploit; however, it may also cause a negative impact on Americans in some locations — particularly in high-tax states like New York and California.
Changes to Retirement Accounts
A concerning part of the tax reform is the potential impact on retirement accounts. The traditional 401(k) retirement account allows an individual to put aside $18,000 before they are taxed on their income. This helps reduce income taxes, and may bring some individuals into a lower tax bracket.
While Trump’s plan does not specifically focus on 401(k) plans, it does borrow ideas from previous attempts at tax reform that focused on changing the traditional plan to a taxable account with similarities to a Roth 401(k) or a Roth IRA.
The Republican bill does not currently have a plan for retirement accounts, but it is a consideration that may result in changes in future adjustments to the plan. The primary downside of the limitations to a retirement account is the possibility of paying more in Federal taxes due to a higher taxable income level.
Investment Accounts and Taxation
Investment accounts differ from income taxes because you have already paid the income taxes on the money. These taxes focus on your capital gains in the account when you sell an investment.
Trump’s tax reform will make changes to investment accounts when you choose to sell an investment. Individuals making less than $37,000 per year, or a married couple making less than $75,000 annually will not have any capital gains taxes. If you make less than $112,500 as an individual or $225,000 as a married couple and the amount exceeds the minimum tax bracket, then you will pay 15 percent on capital gains. Any individual or couple exceeding the lower tax brackets will pay 20 percent in capital gains taxes.
Taxation on accounts you obtain through an inheritance will also change. Trump’s plan strives to eliminate the “death” tax, better known as the inheritance or estate tax, if the amount is less than $5 million for an individual or $10 million for a married couple. For individuals who obtain an inheritance, the adjustment will help reduce the liability associated with funds you receive when a loved one passes away.
Overall Impact
Ultimately, the impact of tax reform on your finances will depend on the specific income you make — and in some cases, where you live. It will help individuals who have children as well as those who receive an inheritance throughout the year. Since the child tax credit will increase under Trump’s recommended changes, it will help families who may need the extra funds to manage lifestyle expenses or the needs of children.
The changes to the exemptions may result in slightly higher taxes for some individuals, but the primary changes in relation to exemptions are on a state level rather than a federal level. By increasing the standard deduction and the child tax credit, as well as making the tax code easier for the average American, the overall impact is positive for most Americans.
Regards,
Ethan Warrick
Editor
Wealth Authority
