So far, a new tax code is merely a gleam in the president's eye. But portions of it have wide support in Congress, so it's not impossible that some version of this radical proposal could become law by the end of the year. If so, it will affect your financial decisions in an unexpected number of ways. Here's where to start in estimating its effects:
*Get out your tax returns and test the effect of the proposal on your income. Chances are you'll love the changes, because your own tax would go down.
If you take the standard deduction, you'd pay less. If you get only a small tax break from itemizing, you could abandon H&R Block, take the simple standard deduction and also pay less. That covers about 75 percent of taxpayers, all of whom should be demanding that their congressmen pass this plan.
Most taxpayers who itemize also would pay less, because the lower tax rates would more than offset any deductions they might lose. The richer you are and the less you've used tax shelters, the bigger the tax cut you'd be likely to get.
In fact, taxpayers who stand to benefit the most are those earning more than $200,000 a year. Of that group, 71 percent get tax cuts, compared with 64 percent of the people making $30,000 to $50,000, and 59 percent of the people earning $10,000 to $15,000, according to estimates by the U.S. Treasury.
* Start looking around for cheaper sources of loans. If your tax bracket falls, the real, economic burden of the interest that you pay goes up -- because you can't shuffle off as much of it on your tax return.
The tax plan also puts a cap on how much consumer-loan interest you could write off. If you're paying 20 percent on your bank credit cards, and find that you're over your tax-deductible limit, that card has become practically usurious.
Consumers have been ignoring the fact that credit-card rates keep going up, even though other interest rates are tumbling. The prospect of fewer deductions for interest rates might lead consumers to start canceling extra cards, which might in turn put pressure on the banks to wise up.
At present, easy sources of cheaper loans are few: Cash-value life-insurance policies (if you aren't borrowed bare already); loans from stockbrokers against the value of your securities; floating-rate loans against the value of your house; car-dealer loans, on certain models. Otherwise, your only recourse is to pay more attention to which lender offers the lowest rates.
Here's how to figure whether you're exceeding the proposed limit on tax-deductible interest:
First, set aside the mortgage interest on your primary home, your business-loan interest, and mortgage interest on a rental house that you run as a business. Those expenses remain fully deductible.
Second, add up all the rest of the interest you pay -- on car and credit-card loans, home improvements, vacation homes that you don't rent out, loans to finance investments and, if you bought any limited partnerships, your share of the partnership's interest expense.
Third, add up all your investment income -- for example from savings certificates, bonds, dividends and rents.
Fourth, subtract your investment income from your interest expense. Any remaining interest payments over $5,000 would not be deductible when the president's plan is fully phased in.
Yes, that's supposed to be "tax simplification." If you itemize deductions, you'll probably get an extra tax schedule or worksheet with your tax return, just to figure it out.
* Start looking for banks and brokerage firms that make "home-equity" loans. These are revolving lines of credit against the value of your house. You pay an up-front fee, plus a floating rate of interest on the amount of money that you have borrowed every month.
You often can arrange credit for up to 75 or 80 percent of your house's value, less the amount of the mortgage you already have. If your house is worth $100,000 and you have a $50,000 mortgage, you can open a credit line for as much as $30,000, if your income qualifies you for so large a loan.
Here's the beauty of the home-equity loan, if the president's tax plan passes: Any items charged against this credit line are effectively part of a mortgage on your primary home, hence all the interest would be tax deductible. So you could arrange for larger effective write-offs than you might first have thought.