President Donald Trump has a tax plan that promises to simplify household tax filings and grow the national economy. But how would it affect you, your business and your investments?
Some may also wonder how a new tax law would look after passing through the sausage-like legislative process on Capitol Hill.
Bankrate took a hard look at the Trump tax plan as well as the GOP blueprint for tax change. Read on to discover how Trump could change the tax system — and your finances.
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Cut down on number of individual tax brackets
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Trump’s plan would replace the seven personal income tax brackets we have now — which range from 10 percent to 39.6 percent — with just three tax rates. The new rates would be 12 percent, 25 percent and 33 percent. Right now, the lowest tax rate is 10 percent.
But Republicans on Capitol Hill have a tax blueprint that would have to be reconciled with Trump’s plan before becoming the law of the land.
Regardless, taxpayers will have to do the math to see where they’ll come out under any revamped code. At first glance, the GOP plan appears to give a tax increase for those in the lowest earnings bracket. Individuals making $9,275 a year or less are subject to a 10 percent rate now, but under the proposed three-tier rate structure, those filers would align with a 12 percent tax rate.
But the House blueprint claims that the larger standard deduction “in effect creates a larger zero-percent bracket. As a result, taxpayers who are currently in the 10 percent bracket always will pay lower taxes than under current law.”
Households in the remaining six tax brackets would see decreases in their tax rates under the Trump and GOP plans.
Trump’s plan would eliminate the head of household filing status.
Under today’s tax code, a taxpayer filing as a head of household — a single parent or qualified caregiver — is subject to a 10 percent tax for her first $13,250 in yearly earnings before moving up to the 15 percent bracket. But a single filer has a bigger tax bill because she gets hit with the 15 percent levy when her income surpasses $9,275. It works this way all the way up the ladder to the highest bracket. It’s clear the current tax system favors head of household filers over single filers.
On the other hand, a head of household at the lower end of the earnings scale would benefit from the Trump tax plan. That’s because of the proposed $15,000 standard deduction for single filers, which is more than double the current one.
The House plan would dole out a slightly less generous $12,000 standard deduction; $18,000 for single individuals with a child in the household.
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Simplify the deductions-exemptions-itemization puzzle
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As noted earlier, singles filing under Trump’s proposed tax code would have a $15,000 standard deduction, more than double today’s $6,350. The standard deduction for married couples filing jointly would increase to $30,000.
But the trade-off could be big. Trump would eliminate personal exemptions, which reduce a taxpayer’s adjusted gross income. Filers who choose to itemize would be subject to caps. Married-joint filers would be able to write off up to $200,000, while itemized deductions for single filers would max out at $100,000.
“Currently, 33 percent of taxpayers itemize,” says CPA Andrew Martin, managing partner at Martin & Associates, a tax advisory based in Las Vegas. “Under the new higher proposed standard deduction of $30,000 (for married joint filers) it is estimated that only 5 percent of taxpayers will remain itemizing. That is a huge change.”
The GOP plan would eliminate most itemized deductions and consolidate the basic standard deduction and personal exemptions for families and individuals.
It’s hard to find someone who speaks well of the alternative minimum tax, and both the Trump and GOP plans would eliminate it. The GOP tax proposal calls the AMT a “second tax system.”
“The AMT is particularly burdensome for small business owners, who often do not know whether they will be affected by the AMT until they file their tax returns and therefore must maintain a reserve for potential AMT liability — funds not being used to create jobs or grow their businesses,” according to the authors of the GOP plan.
The authors quote National Taxpayer Advocate Nina Olson, who over the years consistently argued that the AMT penalizes families and recommended its permanent repeal.
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Lower taxes on business income
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Many small businesses — sole proprietors, S Corporations and other types of pass-throughs — currently are taxed under the individual structure at the highest rates.
Trump’s plan would lower the corporate income tax rate on all business income from 35 percent to 15 percent, but that proposal may well prove to be too costly. The non-partisan Tax Policy Center estimated the whole Trump package to cost $9.5 trillion over its first decade, with roughly a third of that from the reduction in corporate taxes.
The GOP plan would lower corporate tax rates to 20 percent and create a new maximum business tax rate of 25 percent for sole proprietorships and other types of pass-through entities.
While interest income is taxed at ordinary rates, certain types of investment income — net capital gains and qualified dividends — are subject to a top rate of 20 percent. House Republicans view the levy on savings and investments as “double taxation” because they are made with after-tax earnings plus the investment returns are taxed. The GOP says that the true tax rate is closer to 25 percent when you take into consideration the 3.8 percent net investment income tax, or NIIT, and other tax provisions.
The House blueprint proposes individuals and families be able to deduct 50 percent of their net capital gains, dividends and interest income. This, Republicans say, would take the 25 percent rate down to a basic 6 percent, 12.5 percent or 16.5 percent tax, depending on the individual’s tax bracket.
“The issue of ‘double taxation’ is partly accurate,” says Martin of the Las Vegas tax consulting firm. “The tax on dividend income is much lower for the individual than what the rate is on ordinary income. I think their point is that it does not offset enough, especially when factoring in the NIIT on high income recipients.”
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Kill the ACA tax
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Republicans, including Trump, want to kill the so-called “3.8-percent Obamacare tax” — the net investment income tax created under the Affordable Care Act.
Republicans say repealing these “economically damaging tax increases,” though, “should not be paid for with other economically damaging tax increases.” Rather, they say, killing these increases “should be paid for by repealing the massive new entitlement program created by Obamacare.”
Martin says he dislikes using the word “entitlement” since taxpayer money is used to fund the program.
“It is clear wealthy people hate paying this tax,” says Martin. “We need to really look at how these taxes are implemented, the benefits paid and the tax rates and structures involved.”