Tax reform has been a major subject of debate in recent years. Closing the deficit has prompted creative ways of generating money from both political parties. Between all the controversy, it’s difficult to figure out what might actually change and how it could affect the average taxpaper. Below are three tax breaks currently used by many Americans that could go away in the near future.
- Health Insurance Tax Exclusion: More than 160 million Americans take advantage of employer subsidized health insurance. Employers pay the bulk of the insurance bill, and the amount the employee is responsible for gets deducted pre-tax from each paycheck, lowering their overall taxable income. However, the Joint Committee on Taxation argues that $760.4 million will be lost over the next five years if this tax break stays in place.
- Local and State Tax Deduction: Taxpayers who itemize their deductions are able to deduct the amount of their state and local taxes from their federal tax return. Theoretically, this arrangement benefits states and municipalities because taxpayers are willing to accept a higher rate if they can deduct the amount from their federal taxes. Opponents, however, argue that the tax break is unfair because people living in high-tax states and cities benefit more than others. They estimate $278 billion could be collected over the next five years by eliminating this tax break.
- Capital Gains Exclusion: Currently, if a person inherits an investment that has grown in value, they only owe capital gains tax on the amount the investment has appreciated since it was inherited, and only when the investment is sold. No tax is owed on the increase in value before the original owner died. Opponents argue that this tax break unfairly benefits the wealthy. Essentially, if a person holds stock until his or her death, the appreciation is completely tax free. It’s estimated the federal government could collect an additional $258 billion over the next five years by eliminating this tax break.
Stay tuned as the tax debate continues to unfold. Contact us with any questions regarding how current or upcoming legislation could affect you or your business.