11 Ways Middle-Class Families Can Prepare for Trump's Tax Plan
If one thing is certain about President Donald Trump's proposed tax plan, it's that not much is certain yet. The upshot is that Trump is aiming to conduct the largest tax reform in the history of this country. Although it's challenging to pin down who might be affected and how, with so little concrete information released thus far, Cheapism.com asked several tax and finance experts for some initial thoughts and insights to help middle-class taxpayers prepare for potential changes.
There are currently seven personal income tax brackets, in which annual income is taxed at 10, 15, 25, 28, 33, 35, or 39.6 percent. Trump's plan would condense the tax structure to just three brackets: 10, 25, or 35 percent. There has been no information released about what the income levels will be for each of those tax brackets, so Joshua Zimmelman, president of Westwood Tax & Consulting LLC, says it's too soon to celebrate or panic. "It's possible that some taxpayers will actually be moved to a higher rate rather than a lower one," he says. "Until we know more about how the income levels are redistributed among these three rates, it's unclear if the new brackets will help or hurt taxpayers."
Those who end up in a lower tax bracket will be paying less in taxes, says Dan White, founder of Daniel A. White & Associates in Glen Mills, Pennsylvania. The smart thing to do? Save the difference. "If you end up getting bumped down under Trump's plan, and you're still earning the same amount of money, you just got a tax break," he says. "It's like found money. You should save it."
For taxpayers who find themselves suddenly in a higher bracket, there are ways to help offset some of that extra tax liability. Put more money into tax-deductible accounts, such as a 401(k), White suggests. Because those contributions are made with pre-tax funds, they lower taxable income. "Max out, if you can, on those contributions," he says. "The middle class may have a tough time doing that, but add as much as you can to those contributions."
Trump's tax plan would also eliminate nearly all deductions. "The elimination of many deductions could cost some middle-class taxpayers more," says financial consultant Joshua Zimmelman, "especially the elimination of the deduction for state and local taxes (for those taxpayers in high-tax states)." Many clients of Zimmelman's New York-based firm, for example, would lose the ability to deduct their state and city taxes -- a valuable deduction.
While moving is not feasible for everyone, White says it should not be ruled out by those severely impacted by the elimination of the state tax deduction if they're not tied to a specific place. "You never want the tax tail to wag the dog, but let's face it: If you're paying a lot of state taxes, you may want to consider relocating if you're no longer able to deduct those taxes," he says.
Medical expense deductions may be another item on the chopping block -- so forget being able to write off expensive, qualifying procedures that insurance doesn't cover. The Internal Revenue Service currently allows taxpayers to deduct qualified medical expenses that exceed 10 percent of adjusted gross income for the year. "Right now under the current tax code, we know certain deductions are allowed, like medical bills," says White. "If you need to have a procedure not covered by insurance, like a big dental surgery, and you're nervous that the new tax plan might get rid of that deduction, do the procedure this year."
If you've always daydreamed of owning a business, now may be the time. There are significant benefits in the proposed code for small business owners, says Anthony Parent, a partner at Parent and Parent, LLP. Under the proposed reforms, small businesses could elect to pay a corporate tax rate of 15 percent, a substantial cut from the current corporate rate of 35 percent. "The people benefitting most would be working-class business owners," he says. "Go out and open a business. Many people just need something to push them, and this may be it."
Already own a business? Consider taking it to the next level. "If you are a sole proprietor, you may want to change into partnership," says Brent Lipschultz, a personal financial services partner at consulting service PwC. "Under the Trump proposal, you can elect a lower tax rate of 15 percent." Still resistant to the idea? Talk it over with a professional. "A lot of middle-class folks don't do partnerships, because the legal fees to get set up are expensive and there are costs associated with compliance. But it may be worth it. It may be a way to reduce tax rates," he says.
The new tax plan may reduce the incentive to take on mortgage debt, particularly for middle-income home buyers. According to Philip Lang, chief operating officer and co-founder of the website Triplemint, only taxpayers with mortgages of $600,000 or more will continue benefitting from the mortgage interest deduction under the new plan. "In order to take advantage of the mortgage interest deduction, your interest expense must be greater than the standard deduction," Lang says. Chances are, most members of the middle class can kiss that deduction goodbye.
This is the first time in decades that the country's tax code is set to go through major revisions. The regulations, while getting simpler on some levels, may also become very confusing. Consider hiring a professional to assist with tax preparation once the new plan is in place. "It might be worth hiring an accountant for those who have been doing taxes on their own prior to this," says financial advisor Brent Lipschultz. "This is a significant overhaul. It's going to get very complicated, very fast."
While the final details of the Trump plan are not likely to be known soon, be prepared for any changes by managing finances wisely. "You should be saving as much as you possibly can," says White. "No one is certain what the tax brackets are going to look like, but people should save as much as possible to prepare for the new economic environment in general."