Tax reform took on new urgency for the Trump administration after it was unable to repeal and replace the Affordable Care Act (also known as the ACA or Obamacare), but disagreements that persist between the president and GOP leaders in Congress have put any action in doubt for now. The Senate has passed a budget plan, but no specifics regarding tax reform have been worked out yet, leaving the issue’s fate uncertain.
For advisors and consumers alike, this means a wait-and-see situation. “Don’t overreact or make any reactionary plans based off of something that isn’t law, but make sure you’re aware of the changes that are being proposed,” says Garrett Oakley, a certified financial planner at Betterment, an investment adviser.
Here’s what could be in store on tax reform.
Fewer Tax Brackets
While most experts agree that the number of tax brackets is likely to be reduced, it’s unclear what the revised pay ranges might be. “Will we see seven brackets compress to three? Absolutely this will happen,” says Craig Bolanos, founding partner and CEO of Wealth Management Group, although he notes that determining what the associated income levels might be is a guessing game at this point. “It wouldn’t be too far of a stretch to anticipate that we might just see the emergence of a so-called fourth bracket to encompass the highest-income earners in the country,” he says, as that might garner Democratic support.
Because brackets have not been defined, it’s difficult to determine specifics about what the plan could mean for taxpayers. “If this were to go through, its effect on individuals’ specific situations and families depends on where the income brackets would stop and start,” Oakley says.
Other proposals include repealing the estate and gift taxes, which would likely face strong opposition because repeal would favor only a small part of the population, says Bruce Givner, a lawyer at Givner & Kaye. The proposed elimination of the deduction for state and local taxes would also benefit only high earners, Givner says.
Beyond the lack of specifics, other proposals seem to be small rather than representative of a large reform, experts says. “Meaningful reform and simplification has to shrink the tax code itself and make it more straightforward,” says Robin Goldsmith, a tax lawyer at Go Pro Management. “Eliminating the estate tax does simplify and shrink, but clearly to the benefit of a small, exclusively well-to-do group.”
Trump and congressional Republicans are still looking for ways to unify after the failure to come together to repeal the ACA. Trump’s feud with Sen. Bob Corker, R-Tenn., has overshadowed efforts to work together, for example, and it’s unclear whether any action will move forward.
“With less than 30 actual legislative business days in the year left, Trump’s tax plan will need a booster shot of support if it is to survive the pending cold spell that gets ushered in along with the change of season,” Bolanos says. As the details get hammered out, there may be areas that make bipartisan action more realistic.