Historic Tax Reform Compared to Today
The alternative minimum tax (AMT) arose as part of the Reagan administration’s tax reforms. In addition to simplifying capital gains rates and taxation, the top marginal tax rate dropped from 70 percent to 28 percent. The AMT and passive activity rules were put in place as a way to close “loopholes.”
Lower tax rates sound good until we note the loss of certain itemized deductions that have never returned, such as deducting credit card interest and a dependent’s student loan interest. However, marginal tax rates were raised over and over again through the 90s. Additionally, since that time, more middle class Americans who saw their incomes rise during the industrial and tech booms have been getting caught in the AMT trap.
Therefore, if additional itemized deductions and other “loopholes” are removed or curtailed, history shows that they will not come back even though the federal government still has the option to raise marginal tax rates. This could be really costly to taxpayers in the long run.
Your Tax Planning Prediction
If I were to look into my crystal ball on tax reform, I would predict that the “reform” that eventually passes will look a whole lot different than this initial framework.
My standard guidance to clients is to look at their own individual tax situation and continue to leverage opportunities that range from tax-deferred savings to keeping track of potential itemized deductions. If a major event has occurred or is on the horizon this year, talk to your CPA about its potential tax impact under the current tax code.
For companies, it is too early to tell if a change in business structure is a good move for tax purposes. We recommend that clients sit tight with their current business structure until we have more clarity on how different business structures will be taxed.
Ultimately, consider your business goals and planning for investments or equipment purchases. Consider the current equipment expensing and bonus depreciation rules, the time frame for which your company will need the equipment, and your projected profits when making the decision whether to invest this year or next. The same holds true for estate planning. Planning with the guidance of your trusted advisors keeps you and your family in more control regardless of the next version of federal tax legislation.
As soon as we see some actual legislation from the Hill, there may be more to discuss for you or your company. Think of Cornwell Jackson if you are in need of longer-range planning, reporting support or guidance. And stay tuned!
Download the whitepaper: Tax Reform 2017 – How New Tax Legislation Will Affect Businesses and Individuals
Scott Allen, CPA, joined Cornwell Jackson as a Tax Partner in 2016, bringing his expertise in the Construction and Oil and Gas industries, and 25 years of experience in the accounting field. As the Partner in Charge of the Tax practice at Cornwell Jackson, Scott provides proactive tax planning and tax compliance to all Cornwell Jackson tax clients. Contact him at Scott.Allen@cornwelljackson.com or 972-202-8032.