Uncertainty Over President Trump’s Tax Reform Plans
President Trump claimed today that rich Americans will “not be gaining at all” from his proposed tax reform plan. That runs counter to many analyses of the tax reform plans he campaigned on as a candidate, which found that the rich would in fact benefit. The devil, of course, is in the details, but this statement leads to speculation that key details of the tax reform plan may have changed, which could be bad news for investors and businesses.
Capital Gains Taxes
One area that might be affected is capital gains taxes. Because so many wealthy people make so much money through capital gains, low capital gains taxes are derided as a subsidy to the rich. Long-term capital gains rates are 15% for most taxpayers and 20% for those in the top tax bracket, well below income tax rates. One popular suggestion that has arisen is to raise capital gains tax rates to boost tax revenue, or to treat them as ordinary income. But while that might bring in a little bit of money and penalize the rich slightly, making changes to capital gains taxation could very likely raise taxes on mom and pop investors too.
Non-Profit Tax Exemption
The non-profit tax exemption has been under fire for a while. A lot of wealthy people donate to charity in order to deduct those donations from their taxes. Some studies have declared that allowing deductions for donations to 501(c)(3) non-profit organizations doesn’t have an effect on charitable giving, and should be done away with. Non-profit leaders disagree and will fight vehemently to ensure that donations to their organizations will remain deductible. Still, expect to see the 501(c)(3) deduction used as a bargaining chip in future negotiations.
401(k) & IRA Taxation
There has even been a discussion of taxing 401(k) and IRA retirement accounts. The great benefit of these accounts is that individuals are able to use pre-tax dollars to invest for retirement. Taxation doesn’t occur until distributions are taken from the accounts once the individual retires, is required to take a mandatory distribution, or otherwise needs the money. Getting rid of that ability to use pre-tax dollars would essentially force all retirement accounts to become Roth-type accounts and would have a dramatic effect on retirement savings and the financial industry.