2012 Presidential Election – Talk of Tax Reform

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Talk of Tax Reform again during the 2012 Presidential Election. Will taxes really go down? 

I have been preparing income taxes for clients since 1980.  Every four years, Presidential candidates knowing that no one is in favor of higher taxes (except maybe for Warren Buffet). 

First, we have too large deficits. 

Second, social security and medicare are bankrupt. 

Third, the credit worthiness of the U.S. has fallen.

The President’s Advisory Panel on Federal Tax Reform recently released its report, titled Simple, Fair, and Pro-Growth: Proposals to Fix America’s Tax System.

The idea of this round of tax reform is not less tax money for the government. No, the idea is to collect the same amount of money in a different way. The panel members are not sure how they want to take your money, so they put forward two options for the tax-writing committees to consider:

Plan A, called the Simplified Income Tax Plan, and

Plan B, called the Growth and Investment Tax Plan.

Two options are not a simple start, so don’t expect your taxes to be much easier when this is over.  But if they are, be very alert. “Easier” often means a change in the landscape.

On the other hand, some tax changes call for instant action to avoid economic disaster. For example, with the tax reform act of 1986, the top tax rate dropped from 50% to 28%, but the government collected the same tax money with the lower rate. How did that happen? Simple: The government took away some deductions, which increased taxable income. Applying the lower 28% rate to a larger income base produced the same tax.  You wouldn’t have paid less tax.

If you owned rental real estate when the 1986 act became law, you saw the value of your property drop by 20% solely because of tax changes.

The 1986 reform used the nice, low 28% as its selling point. Unfortunately, the nice, low 28% applied to everything, including capital gains, which had previously been taxed at 40% of your regular tax rate, which made for a 20% maximum rate. Of course, the real problem with the nice, low 28% rate is that it did not last long. Within a very short period, tax rates jumped from 28% to 31% and then to 39%.

Don’t be afraid of rate changes. You can use them in your planning. If you know rates are going to be high one year and lower in another year, you can plan your deductions to take advantage.  I can help you with that.

Of course, tax rates are only part of the equation. Deductions, another part, can have an even more significant effect. The tax panel would substantially reduce the tax deduction for mortgage interest. If you pay no mortgage interest or very little, you  probably don’t care about this provision. On the other hand, if you are going to be one of those on the short end of this stick—losing a big chunk of your mortgage interest deduction—you may want to revise your planning.

This much we know for sure: Tax changes are coming IN 2013—some beneficial, some not. You need to protect yourself, so pay attention. Paying attention pays off!!!

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About Jeffrey Brooks

Jeffrey Brooks, CPA, CFP, MBA since 1976 has specialized in helping clients save significant taxes, help businesses increase their cash flow, revenues and profits while increasing their control and satisfaction. Jeff and his accounting firm sincerely cares about the happiness of his clients.

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JBrooks Wealth Advisors, PC.

Certified Public Accountant
Address: 4647 N 32nd Street, Suite B245
Phoenix, Arizona 85018
Phone: 602-292-2009
Email: jeff@jbrookswa.com