President Trump delivered his pitch on tax reform in Missouri last week, calling for reduced complexity in the personal tax code.
“This enormous complexity is very unfair,” he said. “It disadvantages ordinary Americans who don’t have an army of accountants, while benefiting deep-pocketed special interests.”
One way Trump’s personal tax plan would try to accomplish this goal is by eliminating itemized tax deductions and doubling the standard deduction. This is likely considered a win for the majority of taxpayers who already use the standard deduction, and those craving a simplified tax code. However, a number of taxpayers may miss out on important deductions that in the past have saved them thousands, and some of those potentially-eliminated deductions could have a ripple effect on small businesses in the U.S., depending on the industry in which they operate.
So what will the simplified tax code mean for business owners? Here are three businesses that may need to watch out for changes in business activity should Trump’s personal tax reform take hold.
1. Real Estate Agents
Under current tax law, homeowners can deduct mortgage interest paid on up to two homes, as well as their property taxes by choosing to itemize their expenses. This can make a big difference between itemizing and choosing the standard deduction for homeowners in all states, particularly those in states with high property taxes, such as New Jersey, Illinois, New Hampshire and Connecticut, or states with high mortgage rates, like South Dakota, Montana and Delaware.
Earlier this month, the the National Association of Realtors released its Recess Talking Points encouraging members to tell their representatives that homeowners must be treated fairly in tax reform: “The tax code historically has encouraged homeownership. Proposals that limit interest and property tax deductibility would reverse this course.”
Under the Trump tax plan, a higher standard deduction would mean that it’s not as worthwhile for many Americans to itemize, which many in the mortgage industry worry could take away part of the incentive driving new homebuyers to take the plunge and slow the housing market in effect. Small business owners like real estate agents, mortgage brokers and even home stagers could potentially see a ripple effect from this tax code shakeup.
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2. Charitable Organizations
Eliminating the itemized deduction means eliminating taxpayers’ ability to deduct the money they contribute to charities. Those who donate to charity would no longer see the rewards of their generosity reflected in the amount they owe to the IRS each year, and those who donate with this in mind could be less generous if Trump’s proposed tax plan is enacted. Qualifying charitable organizations could suffer as a result.
A recent study by Indiana University suggests that doubling the standard deduction while lowering the top rate of income by 4.6% could reduce giving somewhere between $5 billion and $13 billion per year. Many charity groups are calling for a universal deduction, or a charitable deduction that would apply to anyone who donates, whether they take the standard deduction or itemize.
3. Residential Builders
Granger MacDonald, president of the National Association of Home Builders, issued a statement in April commending President Trump for tackling tax reform but noting that “doubling the standard deduction could severely marginalize the mortgage interest deduction, which would reduce housing demand and lead to lower home values.”
Lower home values spells bad news for home builders, who could see lower demand as values decrease. This could, however, have a different effect on the business of remodelers as homeowners seek renovation as an alternative to moving.
How will tax reform influence your business? Share with us in the comments. We’ll be doing a follow-up piece soon on businesses that stand to benefit from the Trump tax plan.
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