President Trump has finally released his tax plan. The Trump Tax Plan is billed as “one of the biggest individual and corporate tax cut in American history.” How will it affect you?
Overall Goals of the Trump Tax Plan
The campaign slogan of Trump’s 2016 Presidential campaign was to “Make America Great Again.” His tax plan intends to do so. Here are the basic objectives of his plan:
- Reduce tax rates for individuals and business to keep more money in American’s pockets
- Create millions of jobs due to a lower corporate tax rate
- Simplify the complex tax code
Nearly everybody will agree to lower taxes. After all, who likes to pay more than they have to right? Most people will also like the simplicity of the tax code which can help prevent a tax audit.
The Trump Tax Plan & Individual Taxpayers
Most Americans will see the most visible changes when they file their own taxes. In the United States, we have a progressive income tax where you pay a higher percentage as you earn more money. Currently, there are 7 different withholding brackets. The Trump tax plan reduces that number to only 3 income tax brackets.
The Three Trump Tax Brackets
You can expect to fall in one of the following tax brackets:
Compared to Trump’s initial tax proposal, the bottom bracket is now 10% instead of 12% while the upper bracket increased from 33% to 35%.
While income thresholds were not released in the April 26th White House briefing, his original proposal called for all families making $75,000 or less to be in the lowest tax bracket. According to the Federal Reserve, the average household income in 2015 was $56,516. Most middle-class families will see their rates slightly decrease if they make $75,000 or less & the income thresholds remain the same.
Double the Standard Deduction
Right now, you can itemize your federal tax return after you have $6,300 as a single filer or $12,600 as a married, joint filer in qualified deductions like mortgage interest, charitable contributions, and medical expenses.
The Trump tax plan will double the standard deduction for all filers. So, a family that makes $24,000 or less would pay no income tax with the increased deduction.
Doubling the deduction is another way everybody can save some additional money. Especially if you don’t have enough current deductions to itemize.
Tax Relief for Childcare and Dependent Expenses
If you have a family or preparing to become a parent, the Trump tax plan has stated they will provide relief for childcare and dependent expenses.
Details haven’t been released on what qualifies as relief, but, it will probably benefit most working families.
Eliminate Death Tax & Alternative Minimum Tax
These two eliminations will benefit wealthier taxpayers, but, it’s another way Trump is trying to simplify the tax code and keep more money in your pocket.
Corporate Tax Reform
While most Americans will not see the direct financial effects of corporate tax reform, the theory is that lower business tax rates will spur hiring sessions as companies can spend more money on workers instead of writing a check to Uncle Sam.
Cut Corporate Tax Rate to 15%
Another Trump tax campaign pledge was reducing the corporate tax rate and “reshore” American dollars stashed in foreign bank accounts to avoid the current corporate tax rate of 35%. This current rate is the highest corporate tax rate in the developed world. The rate will drop from 35% to 15% and become one of the lowest corporate tax rates.
One-Time Tax on “Reshoring” Corporate Dollars
It’s estimated that American businesses have deposited $2 trillion in non-U.S. banks to avoid American taxes. Trump has pledged to allow companies to reshore the money to American banks by paying a reduced tax rate. As this money is essentially only earning interest in foreign banks for companies, the money can be used to reinvest domestically to increase payrolls and upgrade machinery.
Downsides of the Trump Tax Plan
While there can be much to like about the Trump tax plan, it’s not a perfect plan. Here’s what you might not like about the proposed tax changes.
Elimination of State and Local Tax Deductions
Trump has proposed eliminating several current tax deductions. One that can be widespread is the ability to deduct income tax paid to your local community or state. Of course, with the standard deduction being doubled, this elimination might not be felt by most taxpayers in the 10% bracket as the new deduction will still be better than the current deductions.
The National Deficit Still Grows
While details of the current Trump tax plan are still pending release, it doesn’t appear to be much different than the plan he touted during his campaign. Taking the projections from that plan, the Trump tax plan will receive $6.2 trillion less in the first 10 years than the current tax code.
While tax revenues are projected to drop under the Trump tax plan, the national deficit is still projected to grow. Unless spending is reduced proportionally, the deficit will widen even quicker because of the lower tax rate.
The Trump administration says their plan is self-paying. It might be, but, until any tax plan (or any government program for that matter) is enacted, actual figures could be vastly different than projected figures. If the economy doesn’t revive as Trump hopes, sharper tax increases might be required in the future to offset the previous losses.
If the Trump tax plan passes, we can expect lower tax rates for most people. While the exact income thresholds haven’t been announced, families earning $75,000 or less most likely will only pay a 10% federal rate instead of 15%. Along with a simpler personal tax code, the real potential is with the corporate tax rate reform which will hopefully strengthen the economy by expanding payrolls and improving corporate balance sheets.