Too early to calculate effects of tax reform outline

Q: Is there a website that gives a quick calculation of the effect of the Trump tax plan on someone’s tax liability? I know it would just be an estimate but I have read media reports that both seem to say I would get a tax cut and a tax increase. Obviously both can’t be true so I’d like to know roughly how I would be affected.

A: There is no website that I am aware of and I cannot imagine that a website could be created that would give a reasonable estimate of the effect of the one-page plan released by the administration.

The plan is just not specific enough to develop a number that reflects how much tax you would pay. Although rates are shown to drop, we do not know at what range of income each rate will apply, nor do we know what taxable income will be under the so-called plan.

We are told that certain deductions would be lost, but it is not clear which ones. Some, such as state taxes, are specified but there are many unspecified deductions that we are told would be eliminated to avoid a massive tax cut.

At this point I would just sit tight and not worry at all about the effects of a onepage plan.

Q: I’m not a rich guy but I still support elimination of the death tax. It seems to me that a lot of time and expense are wasted by rich people to avoid the death tax. But don’t you think it is a good idea to simplify the tax laws?

A: I absolutely think it is a good idea to simplify the tax laws. But let’s examine your suggestion.

The estate tax applies to people with taxable estates in excess of $5,490,000 (the 2017 figure that is inflation adjusted). This means it applies to about one in 450 decedents.

More than 99 percent of us spend no time or expense trying to avoid the estate tax. Eliminating it would thus save little overall time or expense. It would, however, strike at a value that has been in the tax laws for many years.

That value is that we should not encourage the development of an idle rich class. The estate tax raises little revenue. Its goal is to reduce the likelihood of assets passing down to lower generations who could then avoid the need for work.

But let’s say we get rid of it. We did that in 2010. There is then an important problem that must also be dealt with. When someone inherits property from a decedent, the income tax basis becomes the fair market value of that asset at date of death.

This means if Dad dies with Google stock he bought in 2012 for $300,000, but is now worth $900,000, the person who inherits the stock has a tax basis of $900,000. The stock may then be sold with no gain and no income tax.

The vast majority of us are most affected by the adjustment to tax basis for inherited property. This adjustment exists so there is no doubling up on a decedent and his family — the asset is in the taxable estate, so the beneficiary gets the income tax adjustment.

No estate tax means no income tax basis adjustment. So to make the no-estate-tax policy palatable to the average guy, Congress has to keep the income tax basis adjustment.

Now how do you keep the basis adjustment? Well, you have to say that if the asset would have been in the decedent’s gross estate under “old” (estate tax) law, a basis adjustment is available.

So eliminating the estate tax would also still require us to keep all the language in the law as to what is included in the gross estate. And that is complicated stuff.

Now you could simplify things by completely removing all the gross estate language eliminating both the estate tax and the basis adjustment to the estate beneficiary. This would help one of 450 people and hurt 449 of 450.

Nothing is easy in the tax law. We are always told it is easy to simplify things, but in real life, simple is not easy.