In Trump’s recent address to Congress on Tuesday night, he said he would provide “massive tax relief” to the middle class and cut corporate taxes, but he offered no details.
Per the tax policy center, “Trump’s plan will cut income taxes at all levels, but high-income taxpayers would receive the biggest cuts, both in dollar terms and as a percentage of income.
The proposal Trump has outlined will need to be negotiated with the House Republicans and in the upcoming months, the details of the proposal will be debated.
According to U.S. Treasury Secretary Steven Mnuchin, new tax reform is expected to be passed by Congress and signed by the President as early as August.
Here’s a Quick Recap of Trump’s Plan:
Fewer Tax Brackets
Trump’s plan calls for a reduction of today’s seven tax brackets to three – 12%, 25%, and 33%. If you are currently in the 33 or 35% tax bracket, your taxes would drop under the Trump tax plan. Top wage earners can expect to see a decrease in taxes from 39.6% to 33%, a 6.6% savings, or $66 for every $1,000 taxed at the top marginal rate.
|Ordinary Rate||Capital Gains Rate||Single Filers||Married Joint Filers|
|12%||0%||$0 to $37,500||$0 to $75,000|
|25%||15%||$37,5000 to $112,500||$75,000 to $225,000|
*Courtesy of The Tax Foundation. Amounts are taxable income.
Increases for Some Taxpayers
For Two Groups of Individuals, rates would increase:
- Individuals currently in the upper half of the 28 percent tax bracket would be bumped into the 33 percent tax bracket.
- Taxpayers now at the lowest end, in the 10 percent bracket would be pushed into the 12 percent bracket.
Per Gregg Wind, a CPA partner in an LA firm, middle-income taxpayers might pay more:
- A single person now paying 28 percent tax on income up to $190,000 would, under the Trump plan, pay 33 percent on earnings over $112,500-about $3,500 more than today.
- Married couples now paying 28 percent on income between $151,900 and $231,450 would, under the Trump plan pay 33 percent on about $8,000 of that income-an extra $400 out of pocket.
One point of caution is that we can only speculate until the tax reform legislation is enacted into law. The tax savings are speculation and can change based upon the limitations, phase-outs, credits, and other provisions that will accompany the legislation.
Capital Gains & Alternative Minimum Tax (AMT)
The special capital gains rate for dividends will remain, but the net investment income tax of 3.8%, that currently applies to capital gains and dividends will be repealed. The plan would also repeal the Alternative Minimum Tax provisions, a supplemental income tax imposed to ensure all individuals despite high income and exemptions pay a baseline federal income tax.
Increase in Standard Deduction
Trump would like to increase the standard deduction to $30,000 for joint filers and $15,000 for single filers up from $12,600 and $6,300 last year. The plan would combine the regular standard deduction, personal exemptions for taxpayers and dependents, additional standard deductions for blindness and age into one NEW increased standard deduction. The plan would eliminate the personal exemptions of $4,050 deductible to those couples earning less than $311,300 last year and singles at less than $259,400.
The increase in the standard deduction could make filing a return simple for millions of taxpayers. It is estimated that as many as 27 million of the 45 million filers who itemize would elect the standard deduction under the new tax reform.
The plan would place a cap on total itemized deductions that could be deducted at $100,000 for single filers and $200,000 for joint filers.
What Does This Really Mean?
The proposed plan could mean higher tax increases for larger families due to the loss of personal exemptions. Under the current plan if a couple with 3 children elects the standard deduction they could deduct $12,600 plus $4,050 ($4,050 x 5 = $20,250) for every family member for a total of $32,850 versus the $30,000 under the proposed Trump plan. This discrepancy would only increase based on the size of the family.
Trump’s plan would also eliminate the head of household filing status, thus causing families and single parents to encounter tax increases. According to Lily Batchelder, an NYU professor, a single parent with two children earning $75,000 and no child care costs would see their tax bill rise by $2,440 under Trump’s plan. Batchelder estimates that similar increases may apply to over 6 million single parent taxpayers.
Trump’s Plan would reduce the top corporate tax rate from 35 percent to 15 percent. Owners of all entities including pass throughs (like S-Corps, partnerships, and sole proprietors) could elect to be taxed at a flat rate of 15% on the pass-through income rather than to be taxed at the top rate of 33% under Trump’s plan or 39.6 under our current tax structure.
Per the Tax Policy Center, Trump’s plan would reduce the federal receipts by $6.2 trillion between 2016 and 2026, and about three-fourths of the revenue loss would come from business tax provisions.
Estate & Gift Taxes
Trump’s plan calls for an elimination of the federal estate, gift, and generation-skipping transfer taxes. The plan would also tax capital gains held at death with an exemption of $5 million ($10 million for married couples)
Only the wealthiest taxpayers-less than 1 percent-now pay that tax. Ending it would lead to an even greater concentration of wealth in the US- Courtesy of National Public Radio.
Per the Tax Policy Center, Trump’s plan for repealing the estate and gift taxes and taxing capital gains (with the exemptions) at death would result in a net revenue loss of $174 billion over the budget period, adding to the national debt.
Potential Tax Cuts
Tax Cuts at a Glance
$0-$24,800 $110 *
$24,801-$48,000 $400 *
$143,100 and up $16,660
Top 1% $200,000+
Source: Tax Policy Center/Money Magazine
Note: Income divided into quintiles
*Note: Lower earners would benefit from larger standard deduction
Carletta Beckwith CPA LLC is a firm that provides premiere income tax preparation, tax planning, and financial planning services. Carletta Beckwith is a licensed CPA and CFP® and shares her extensive industry knowledge to deliver superior customer service and personalized attention to her clients. To learn more about the services she provides visit www.beckwithcpa.com.
IRS Circular 230 disclosure: Any tax advice included in this written or electronic communication was not intended or written to be used, and it cannot be used by the taxpayer, for the purpose of avoiding any penalties that may be imposed on the taxpayer by any governmental taxing authority or agency.
Disclaimer: Nothing in this document should be relied on and you should seek professional advice if you are in need of tax information or advice. This publication should not be a substitution for personal tax advice as every tax situation is different. You should obtain personal tax advice from a Certified Public Accountant or other tax professional to address your specific tax needs.
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