Tax Reform and Tax Expenditures

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Claire Toth
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Very quietly, members of the President’s economic team have been meeting with key lawmakers to craft a tax reform plan. The stated goal is to pass legislation by year end.  That is an optimistic timetable, but the outlines of a concrete revision may emerge before then. Any Tax Code revision requires Congress to deal with tax expenditures. Tax expenditures are deductions, exclusions, and preferences that reward certain behaviors or certain taxpayers. Essentially, they are indirect government spending. Given the administration’s stated goal of reducing tax rates, expect at least some of these large tax expenditures to be re-examined:

  • Tax breaks for retirement accounts: Individuals get to deduct what they contribute to 401k plans (and the like). Employer contributions are excluded from income (but deductible to the employer). Earnings are tax-deferred until withdrawal.

  • Exclusion for employer-provided health insurance: Employers can deduct the cost of health insurance they provide employees, and that benefit is not taxed to the employee. This is by far the largest tax expenditure, estimated at $235.8 billion.

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  • Favorable tax rates for dividends and capital gains: This income is taxed at fifteen percent versus up to 35 percent for other income. At the very top income levels, the rate is 20 percent versus 39.6 percent.

  • Social Security benefits exclusion: Depending on your income level, 50 or 15 percent of Social Security benefits are tax fee.

  • State and local tax deduction: This includes deductions for both income taxes and property taxes.

  • Home mortgage interest deduction: Taxpayers can currently deduct mortgage interest on two personal residences, up to $1 million in total mortgages.  Further, the first $500,000 of gain on a principal residence escapes tax. Fun fact: total tax expenditures for home ownership exceed the entire budget of the Department of Housing and Urban Development.

  • Charitable contributions: Individuals can donate appreciated assets and deduct the fair market value, effectively escaping tax on the appreciation. Cash is also fully deductible.

  • Basis step-up at death: At death, assets get a new cost basis, equal to then-fair market value. Any pre-death appreciation escapes tax.

Note: Claire E. Toth, JD, MLT, CFP™, is Vice President at Point View Wealth Management, Inc., a registered investment advisor at 382 Springfield Ave., Summit. Visit us at  www.ptview.com.

For nearly 25 years, Point View Wealth Management, Inc. has been working with families in Summit and beyond, providing customized portfolio management services and comprehensive financial planning, to develop and achieve their financial goals. Click here to contact David DietzeJohn PetridesClaire TothDonna St.Amant, and Elaine Phipps, or call 908-598-1717 to learn more about Point View Wealth Management, Inc. and how we can help you and your family meet your financial objectives. To sign up for our complementary commentaries and newsletters, e-mail us at firm@ptview.com.

CNBC has named Point View one of the Top 100 fee-only wealth managers in America.

The opinions expressed herein are the writer's alone, and do not reflect the opinions of TAPinto.net or anyone who works for TAPinto.net. TAPinto.net is not responsible for the accuracy of any of the information supplied by the writer.

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