What Trump’s Tax Plan Proposes
On Wednesday, President Trump unveiled his plan to overhaul our tax code . Nothing has been set in stone yet, and there have been few details, but this is what the administration suggests.
Standard markup to deduction
The plan will simplify tax cuts by doubling the standard deduction to $ 12,000 for individuals and $ 24,000 for joint filing couples. It will also increase the child tax credit and the income cap at which this credit begins to phase out. According to the plan, this will prevent a marriage tax penalty ( some couples actually pay more when they apply together ).
However, by offsetting this, the plan will eliminate granular deductions, including state and local tax deductions . Some taxpayers actually save more when they list their multiple deductions – the new plan ditches that opportunity, so they’ll have to use the standard deductions instead. Some taxpayers may benefit from this; it could hurt others who would benefit from the listing.
At the same time, the plan stipulated that the deduction of interest on mortgages and charitable contributions would not be canceled. They will also add a $ 500 non-performing loan for non-child dependents and remove inheritance and transfer taxes that affect beneficiaries who receive gifts or inheritances.
New tax brackets
The new plan will also cut our current tax bracket system, which includes seven brackets, by three from 12%, 25% and 35%.
However, it does not provide actual parentheses for these rates, so it is difficult to determine which taxpayers will or will not benefit and how much more they can save or pay. Our current lowest tax rate is 10% and our highest is 39.6%, which means the taxpayers with the highest tax are likely to receive a tax cut, while the lowest tax rate will be increased.
Significant tax cuts for businesses
As promised, Trump plans to cut the corporate tax rate from 35% to 20%. The plan also offers a tax rate of 25% for walk-through businesses such as sole proprietorships, partnerships, and S corporations. According to CNBC, 95% of businesses in the US are end-to-end. They explain:
The name comes from the profits and losses of such enterprises, which pass directly to their owners, as opposed to public corporations.
Direct profits are now taxed at a maximum individual income tax rate of 39.6 percent, which is higher than the maximum corporate income tax rate of 35 percent – a discrepancy that walk-through business owners have long complained about.
The administration is also proposing to move our global tax system to a territorial one, which will be a huge change for multinational corporations.
Basically, this means that these corporations will only pay taxes on the income they earn domestically. Currently, when corporations make money overseas and return it to the United States, they must pay a tax called a repatriation tax , but they are also given a rebate on any foreign taxes they pay. The new plan is intended to encourage these companies to return any foreign profits to the US instead of keeping the money offshore.
No more alternative minimum taxes
Trump’s tax plan will also eliminate an alternative minimum tax – a tax designed to keep rich people from exploiting too many loopholes.
Here is a brief history of AMT: How to explain the Tax Policy Center , in the late 60-ies of the Minister of Finance Joseph W. Barr told Congress that 155 taxpayers with incomes of more than $ 200,000 (a considerable sum at the time) did not pay any federal income. tax in 1966. After all, AMT was created to allay the resentment among other taxpayers and solve the problem. This is how the IRS describes AMT:
The Alternative Minimum Tax (AMT) applies to taxpayers with high economic income by setting a cap on these benefits. This helps ensure that taxpayers pay at least the minimum amount of tax.
The argument against AMT is that it has made taxation more difficult for many middle-income taxpayers. CBS News reports:
Throwing away the myriad of deductions, many of which are common in, for example, government income taxes, many taxpayers who are not currently plutocrats find themselves paying more on this more stringent method of settlement. The AMT, as it is called, has not been indexed for inflation, so over the years this tax has come in more and more Americans who do not own private jets.
The counter-argument is that while the AMT makes taxation more difficult for some middle-income taxpayers , it still keeps the super-rich from near-total tax evasion.
When Trump’s 2005 tax return was leaked , for example, it showed that he paid $ 36.5 million – without the AMT, he would have paid only $ 5.3 million.
What does it all mean to you
Trump says the plan’s “ordinary American workers” will benefit the most, and Republicans praise him for a much-needed overhaul of our complex tax system. Democrats argue that this will benefit the richest taxpayers the most, and economists fear that it will lead us to even more debt (adding trillions to our deficit ).
While the theory is that tax cuts will pay off because they stimulate the economy, tax fund economist Alan Cole explains , “Net tax cuts don’t pay off.”
Meanwhile, it’s hard to see how the plan will affect the “average American worker,” because it lacks even basic details about how different income levels will be taxed.
Nonetheless, CBS News estimates that low-income taxpayers will generally come out ahead by increasing the standardized deduction. Taxpayers living in high tax states may benefit less as state and local tax deductions may be eliminated. They report :
For the most part, these are blue states like California and New York. The GOP plan spares royalties on mortgage interest and charitable donations, allowing taxpayers to keep receiving them. Like most deductions, state and local tax deductions tend to benefit high-income people who list the deductions by line item. According to the Center for Tax Policy, households with an annual income of more than $ 100,000 will receive 90 percent of the total tax increase, while those with more than $ 500,000 will take on 40 percent of that amount.
Again, nothing has been set in stone yet and the plan has yet to go through Congress. And before anything happens, Congress will need more information and possibly some significant changes.