A Quick Breakdown of Trump’s Tax Reform Proposal
I’ve been receiving questions on the Trump tax reform proposal: what it is and how it could affect tax paying Americans. First, remember this is just a proposal, there’s a long way to go before any sort of tax reform is actually passed in the House and Senate. There’s so much that could change within the reform as well (and I do expect there to be several revisions). But for the sake of being in the know and making informed future decisions at the voting booth, here’s a quick recap of what the Trump administration is looking to do with taxes:
What We Know So Far:
-Trump’s administration released to the White House press pool a one-page bullet-point summary titled “2017 Tax Reform for Economic Growth and American Jobs”. This quickly went viral when a reporter tweeted a picture of it. It’s funny for two reasons: the complexity of the tax code cannot be reduced to one page. Also, the fonts they used make it look like a sixth grader’s outline for a history report. It’s outrageous.
-Trump wants to reduce the seven tax brackets down to three (10%, 25%, 35%). This is different than the brackets Trump campaigned on and it lowers the top current tax bracket of 39.6% by 4.6%.
-They want to nearly double the standard deduction. The current standard deduction is $6,350 for single filers and $12,700 for married couples filing jointly. If this doubled it would increase the amount of people who take the deduction instead of itemizing. The Tax Policy Center believes this would decrease the percentage of taxpayers who itemize from 30% to 5%.
-The administration wants to provide tax relief to families with child care and dependent expenses. They propose doing this via a savings account, a deduction, and a credit. Different income levels and situations will determine who qualifies for what. It looks like a lot of details need to be worked on this. *Cough cough Ivanka where are you cough cough*
-They want to keep deductions for mortgages and charitable gifts.
-Trump proposed repealing the Alternative Minimum Tax (AMT) and the estate tax (or as some call it the “death tax”). If this passes, it’s a gigantic win for high earners and people with lots of assets.
-Trump wants to repeal the 3.8% ACA tax. This is a net income investment tax which goes to the Affordable Care Act. This tax applies to the investment income of taxpayers with a modified adjusted gross income of more than $200,000, or $250,000 if you’re married filing jointly. This would effectively lower the capital gains tax rate for high earners from 23.8 percent to 20 percent.
-The administration wants to reduce the business tax rate from 35% to 15%.
-A one-time tax on dollars held overseas (repatriation tax). Trump said profits held overseas by multinational companies would be considered repatriated and taxed once at 10%. This is a tax break for companies who keep money overseas because they don’t want to pay 35% on foreign earnings. This would allow them to bring the money back to the U.S. and pay the one-time, much lower rate of 10%.
What We Don’t Know So Far:
-A lot. This one-pager left much to be desired and an even greater amount of questions. When pressed to provide information and clarification, the White House said they’d fill in details later. I think on next year’s tax return I’ll just write “I’ll fill in details of my income later”.
-We don’t know what levels of income will qualify for the 10%, 25%, and 35% tax brackets. That’s a big one. People only care about how much they’re paying in taxes.
-We don’t know who will pay more and who will pay less. Although, it’s looking like the richest Americans will be the big winners.
-We don’t know which deductions and credits will stay and which ones will go other than the few listed on the one-page summary I assume was drawn up by a child using the iPhone Notes app.
-We don’t know who will qualify for the remaining deductions and credits.
-We don’t know how much this reform will affect the deficit.
-There’s going to be debates on both sides. The Republicans don’t want the deficit to increase. The Democrats don’t want to give massive tax breaks to the wealthy. This is going to be a battle. We’ll see what amazing compromises they come up with. LOL!!!! I’m kidding! Compromise!?!? What’s that?!?!
I don’t like to speculate much because the tax code is so unbelievably complex that a one-page summary proposal doesn’t come close to touching every important tax topic. From what I can gather, there are some good, some bad, and a shitload of unanswered questions with this tax reform.
-Eliminating the estate tax (death tax) is significant for the wealthiest Americans. The estate tax kicks in when people with more than $5.5 million in assets (single filers) or nearly $11 million in assets (married couples filling jointly) pass away. This will leave a great deal amount more for their children and grandchildren.
-Eliminating the AMT is also huge for America’s highest earners. The AMT is a supplemental income tax which requires high earning people, companies, estates, and trusts to calculate their federal income tax a second time. The AMT forces taxpayers to pay at least a minimum amount. Because wealthy individuals or entities can use a lot of loopholes to avoid paying taxes, the AMT calculates an alternative amount and the taxpayer will be required to pay the higher of the two calculations. It’s no surprise why Republicans and Trump want to see the AMT die.
-This plan is more top-heavy than Dolly Parton on stilettos. According to the Tax Policy Center, it’s estimated the top 1% of households would see a 14% increase in after-tax income, while low and middle-class Americans would see gains of just 1.2% to 1.8%. Here’s my shocked face: :-l
-Eliminating the deduction for state and local taxes would hurt taxpayers where the state and local taxes are relatively high (mostly blue states).
-The elimination of several other deductions could cause some citizens to pay higher amounts in taxes. The child care and dependent tax relief mainly benefits families who don’t need the subsidy.
-As far as the tax reform for businesses, the goal is to make our corporate tax rates more competitive on a global scale, so we thus attract more business into the U.S.
-With the tax savings, the Trump administration believes companies will create jobs and contribute to the economy. This is somewhat fairytale thinking. The last time corporate rates were cut during the George W. Bush era, 92% of the tax savings was used to buy back company stock and increase dividends for shareholders. This means a mere 8% went to other things, like, you know, job creation.
-Parlaying off the last point, this tax reform will likely be good for investors.
-Trump’s tax proposal could create an issue where individuals are motivated set up LLCs for themselves in order to pay less taxes, thus opening another loophole of sorts.
-Federal tax revenue will plummet, and the deficit will increase if economic growth isn’t as robust as the Trump administration is hoping.
Overall, the tax reform proposal is a mixed bag and there are far too many unanswered questions. Sure, it could potentially put a little extra cash in your pocket, but it’s mostly a massive win for the top 1% of Americans. As I said before, the White House plans to fill in the details as they go, so as we get more information, I’ll be sure to fill you in using as little cynicism and sarcasm as possible.
And if you’re interested in learning more, I’ve included all the sources I used to write this overly simplistic piece below. Although, to be fair, there’s about 2,000 more words in this article than the entire tax reform proposal put out by the White House. *Patting myself on the back.
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