Early proposed ideas to cut personal tax rates and simplify the income tax filing process have already garnered vocal resistance from several key interest groups. Supporters of the proposal to double the standard deduction – a move that is expected to make tax easier by limiting the number of individual filers who itemize – say that such sweeping change is necessary to make the cumbersome tax code more user-friendly.
Proponents of the changes argue that it may be simpler, but that it could have long-lasting, catastrophic consequences, in particular for charities, non-profit organizations and the housing industry.
Why would the impact be so widespread?
The current system allows for itemization of such tax deductions as mortgage interest and charitable contributions. The proposal would do away with those, instead giving everyone, regardless of home ownership or philanthropy, a standard deduction twice the amount it is now. There would be no longer be a financial incentive to seek a mortgage or give to charity.
Of course, individuals and small businesses would be free to continue contribution programs, and prospective homeowners are able to purchase property, but the financial boost given as a result of such activity wouldn’t exist.
Housing industry experts, particularly builders, real estate agents and mortgage lenders, have come out swinging in response to these proposals. They argue that the changes would, in essence, sink the housing market. Some areas of our country are still feeling the impact of the national market downturn of the early 2000s. The memory of those difficulties (and the tens of thousands of homeowners who found themselves suddenly “underwater” on their mortgages or facing foreclosure) is quite fresh for many.
The resistance from charitable leaders has also been vocal. Americans claim about $13 billion in charitable deductions annually, and groups fear that, without at least a universal deduction that incentivizes for philanthropic giving, their contributions would dry up. Particularly at a time when government funding like grants and loans to charities are also in danger, these organizations fear the impact of removing financial incentives like the deductions.
Theory, not fact
For now, these changes, and any potential ramifications of them, are entirely theoretical. Congress is off on its August recess at the moment, and it may be that they decide to focus their efforts on corporate taxation issues instead of individual filers upon their return.
Should these or any other significant tax reform occur, however, there is a good chance that many filers, particularly those with sizable estates, foreign accounts, investments or multi-jurisdictional holdings, will need to closely review their tax compliance strategies. An experienced tax attorney can review tax planning in order to ensure compliance with the law while still receiving the benefit of any deductions, credits, exemptions or loopholes in the code.