How Taxpayers Can Plan for Tax Changes
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This is Your Money Matters from The Wall Street Journal. Welcome to Your Money Matters. I'm Charlie Turner in New York. GOP leaders in the House and Senate have released different plans to overhaul the tax code, with plans to reconcile the measures and hopefully pass a tax reform bill by year's end. There are a lot of differences between the two proposals, and as a result, an exact outcome is tough to predict. What's clear is that the timetable will probably leave consumers with little time to do year-end tax planning. Joining us is Wall Street Journal reporter Laura Saunders. Laura, even though we've talked about differences, they've been broadcast on whatever news outlet you can imagine, there are similarities between the two tax measures that might make it a little easier to suggest to taxpayers what they can do to plan for next year.
So why don't you talk about that, some of the similarities?
Yes. Well, we don't know the details. And those are very important for actions. But what's striking is that despite the differences between these two bills, significant differences, they have broad themes in common. They would give homeowners fewer tax breaks. There would be no deduction for most state taxes, especially state income taxes. It would be harder to take many deductions, particularly your charitable ones. You wouldn't need to. There would be no personal exemption and no alternative minimum tax. Even Congress is sick of that one. And then both bills would expand credits for children. They would double the estate tax exemption so that very wealthy people would benefit even more. And here's the really key difference.
Business owners would get a tax break immediately. But wage earners would not get the same tax breaks. So the business owners would be at an advantage over wage earners, the people making the same amount of net income. And that's really a historic change in the code. It's meant to stimulate the economy. I don't know what will happen, but that's what they mean to do.
Well, why don't we start with regular taxpayers, people who own homes, who want to buy a home or sell a home. What should they plan for?
Well, they should be careful because the Senate bill has pretty much the same breaks we have now, but the House bill says you can only deduct interest on a $500,000 mortgage. And also the House bill seems to take away all deductions for second homes. So that's really important. And if you're selling a home, then try to do it by the end of the year if you want to use the very popular tax break that lets you be exempt on $500,000 worth of profits. And that's because it will be restricted next year.
All right, turning to pass-through income, this has been talked about as well.
What are the shared themes between the House and Senate tax proposals?
This is income, I believe, that's passed through businesses to their owners, and it's taxed at the individual level. What should people know about so that they can prepare?
Well, the important thing there is that this income is being favored, but it's favored differently in the House and the Senate, so really you just have to stay tuned. And based on the details of what they do, you might either want to defer income into next year or accelerate it into this year.
Laura, let's talk about state taxes, also another hot topic. The House bill repeals the deduction for state and local income and sales taxes, caps the deduction for property taxes at $10,000. The Senate bill repeals deductions for property taxes in addition to repealing the others.
I think the thing there is that they are very serious about this, and that's going to hurt a bunch of states, high-tax states a lot, put a lot of pressure on them. They're the states you probably would think of, like California, New York, New Jersey. But Texas has very high property taxes. We'll see what happens there, what they agree on and not. You might want to accelerate some state taxes, prepay them this year if you can still get a deduction and avoid the AMT.
Texas, huh?
Okay. Texas has high property taxes.
Interesting. Okay.
They don't have an income tax, so they have to rely on the property taxes.
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