Correction to WSJ Answers Trump Tax Plan Questions Story

By Laura Saunders and Richard Rubin Features Dow Jones Newswires

Earlier this week, President Donald Trump and Republican leaders proposed an ambitious new tax framework for American taxpayers and companies.

Continue Reading Below

For many, the framework would bring a sharp reduction in their tax rates. But a host of questions remain as leaders in Washington begin the tax overhaul.

We asked Wall Street Journal readers what their biggest questions were and you responded with a flood of interest and comments. Many wrote in with questions about specific provisions, while others wanted to know about the broader economic impact.

Here are our answers to some of your best questions, which have been edited for clarity.

Q: My father's Alzheimer's care now totals $105,000 a year, which allows him to pay no taxes on his Social Security or rental property income. Will he lose that?

Yes, probably. The Journal received more questions about the future of the medical-expenses deduction than any other provision. Currently there is a stiff hurdle to claiming it, because unreimbursed expenses must exceed 10% of income to be deductible.

Continue Reading Below

This means the medical deduction is often highly important to taxpayers who do qualify for it. Many have very large medical bills that in some cases exceed their income.

The Trump framework doesn't mention the medical deduction, but it says it would only keep the write-offs for mortgage interest and charitable donations. So the medical-expenses deduction would probably go.

Q: What about effective dates?

Write-offs for business investment would take effect as of Sept. 27, 2017 if the bill becomes law. A senior administration official said on Wednesday that other changes aren't likely to be retroactive.

Q: Does the Republican repeal of the estate tax maintain or eliminate the current step-up in income-tax cost-basis at death?

The framework is silent on this issue, and House Ways & Means Chairman Kevin Brady (R., Texas), told reporters on Thursday that no decision has been made.

The "step-up" in cost-basis refers to a provision in current law where a capital-gains tax isn't imposed on assets held at death.

Under current law, if a person dies holding shares of stock that are worth $100 each that were bought for $5, the estate doesn't owe capital-gains tax on the $95 of gain. If the investor sold those shares before death, tax would be owed on the gain.

Heirs who receive the shares would then have a cost of $100 each as a starting point for measuring taxable gain when they sell.

The step-up provision benefits many estates that aren't large enough to exceed the current estate-tax exemption of $5.5 million per individual, as well as larger ones -- so changes to it are important.

One alternative would be to have heirs retain the cost-basis from the previous owner. In our example, that would mean that when the heir sold, that person would owe taxes on any gains above $5, perhaps with an exemption that would prevent many heirs from facing that much tax.

Q: What will happen to the 3.8% investment income surtax and the tax on long-term capital gains?

The framework doesn't mention either of these levies on investment income. Mr. Brady said Thursday that the cost of cutting the capital-gains tax was probably too great to fit into the plan but that he was still considering whether it was possible.

Currently, the 3.8% surtax applies to certain net investment income for most singles with income above $200,000 and married couples with income above $250,000.

The top rate on long-term capital gains, which applies to assets held longer than a year, is currently 20%. The current proposal wouldn't raise or lower it.

Lower-earning investors who pay long-term capital-gains rates of either zero or 15% should be aware of Republican proposals to alter these ratesin ways that could raise them for some people. The outcome of these is unclear.

Q: How would Trump's tax plan affect the national debt?

Over the next decade, if Congress does nothing, the U.S. is projected to add more than $10 trillion to the federal debt, according to the Congressional Budget Office. The persistent annual budget deficits stem from modest economic growth, the aging of the population and increasing health-care costs. By 2027, debt held by the public will be 91% of gross domestic product, up from 77% today.

The plan Republicans are contemplating would add $1.5 trillion debt on top of that. Republicans say their plan would at least partly pay for itself by increasing economic growth. Economists in both parties are dubious about those claims.

Q: Older Americans get an extra standard deduction under current law. What would happen to it?

If the standard deduction is streamlined, they may not get it; but the bigger standard deduction would mean that they would end up with a slightly higher deduction.

For 2017, each partner in a married couple who is 65 or older gets an extra $1,250 of standard deduction, so if the couple doesn't itemize they can deduct as much as $15,200. They also get a personal exemption of $4,050 each, for a total of $23,300.

Under the framework, the standard deduction for such a couple appears to be $24,000, slightly more than the current amount.

For most singles in this category, the gain would be slight as well. In 2017, each gets $6,350 of standard deduction plus an extra $1,550, plus a personal exemption of $4,050 -- for a total of $11,950.

Under the framework, their deduction appears to be $12,000.

Q: I operate a tax-preparation business and I have many clients who are single parents. What will happen to the head-of-household filing status?

The framework doesn't mention this filing status, but it might be eliminated based on prior proposals.

This status, which applies to many single filers with dependents, has a more generous standard deduction and wider tax brackets than the one for single filers.

Eliminating it would raise taxes on many people in this category, unless child credits are expanded to offset the increase.

The framework said that child credits would be enhanced, but it didn't give details.

Have more questions about the tax proposal? Please send them to Laura Saunders at laura.saunders@wsj.com.

Write to Laura Saunders at laura.saunders@wsj.com and Richard Rubin at richard.rubin@wsj.com

Corrections & Amplifications

This item was corrrected at 8:59 a.m. ET to clarify that if a person dies holding shares of stock worth $100 each that were purchased for $5, heirs who receive those shares would have a cost of $100 each as a starting point for measuring taxable gain when they sell, not $95 each as a starting point for measuring taxable gain when they sell.

If a person dies holding shares of stock worth $100 each that were purchased for $5, heirs who receive those shares would have a cost of $100 each as a starting point for measuring taxable gain when they sell. "WSJ Answers Your Best Questions About Trump's Tax Plan," at 5:44 a.m. EDT, incorrectly gave the number as $95 in the 15th paragraph. (Sept. 29)

(END) Dow Jones Newswires

September 29, 2017 09:13 ET (13:13 GMT)