We all just saved thousands of dollars on our income taxes by switching to the GOP! (Well, maybe…)
The Trump Administration unveiled the basic outline for the Trump tax plan yesterday, which they referred to as “the biggest individual and business tax cut in American history.” You can read their one pager here. The plan would cut the corporate tax rate to 15 percent; reduce capital gains tax rates; and eliminate a number of taxes, including the 3.8 percent net investment income tax featured in Obamacare, the death tax, and the alternative minimum tax.
More importantly, it would simplify the tax code and cut income taxes for working Americans. Here are a few key takeaways:
1.) The Trump tax plan reduces the number of income tax brackets.
Instead of the current seven brackets at 10, 15, 25, 28, 33, 35, and 39.6 percent, the Trump plan features three brackets at 10, 25, and 35 percent. While the Administration has not yet indicated where the income cutoffs will be, we can look to Trump’s tax plan from the campaign for guidance. In that plan, the cutoffs looked like this:
|12%||0 to $37,500||$0 to $75,000|
|25%||$37,500 to $112,500||$75,000 to $225,000|
The marginal rates changed, so it is possible the income cutoffs will, too. But at these cutoffs, the plan would appear to amount to a very large tax cut for almost everyone. (Note: that first cutoff at $37,500/$75,000 is critical. If the 25 percent marginal tax rate kicks in much earlier, the plan could result in tax increases for some middle class individuals and families.)
2.) The Trump tax plan doubles the standard deduction.
In 2017, the standard deduction is set to be $6,350 for individuals and $12,700 for married couples. The Trump tax plan proposes increasing that deduction to $12,000 for individuals and $24,000 for married couples.
If the personal exemptions remain intact ($4,050 per dependent in 2017), this plan would mean that a married couple wouldn’t be subjected to income tax until they earned at least $32,100. That doesn’t even include child tax credits, which would further reduce their tax burden.
3.) The Trump Tax Plan eliminates most itemized deductions (but not above-the-line deductions).
According to the Tax Foundation, 30.1 percent of American households in 2013 chose to itemize their deductions rather than taking the standard deduction. By doubling the standard deduction and eliminating most itemized deductions (with the exception of charitable giving and mortgage interest relief), the Trump tax plan would encourage more taxpayers to simplify their tax filing by taking the standard deduction.
It’s worth noting that the Trump Administration appears to be targeting itemized deductions, not above-the-line tax deductions, such as student loan interest, contributions to IRAs or health savings accounts, etc.
Again, without knowing the income cutoffs, it’s hard to calculate the exact effect this tax plan would have on taxpayers at varying income levels. But if the Trump administration uses the same cutoffs from the campaign plan, we can come up with rough estimates.
The following figures factor in income tax burden and personal exemptions (one for individuals, two for married couples). They do not factor in itemized deductions, nor do they consider child tax credits or any above-the-line tax deductions, which seem likely to remain the same under the Trump plan.
- Current income tax owed: $1,726.25
- Under Trump tax plan: $825.00
- Current income tax owed: $5,671.25
- Under Trump tax plan: $3,325
- Current income tax owed: $11,921.25
- Under Trump tax plan: $8,937.50
- Current income tax owed: $18,171.25
- Under Trump tax plan: $15,187.50
- Current income tax owed: $32,124.75
- Under Trump tax plan: $29,762.50
- Current income tax owed: $46,124.75
- Under Trump tax plan: $47,262.50
- Current income tax owed: $62,597.25
- Under Trump tax plan: $64,762.50
Under the Trump Tax Plan, working class and middle class individuals will receive a large tax cut. Rich individuals are likely to see a slight tax increase, which may be exacerbated further by the elimination of many of the itemized deductions.
- Current income tax owed: $3,452.50
- Under Trump tax plan: $1,650.00
- Current income tax owed: $7,202.50
- Under Trump tax plan: $4,150.00
- Current income tax owed: $11,342.50
- Under Trump tax plan: $6,650.00
- Current income tax owed: $23,842.50
- Under Trump tax plan: $17,875.00
- Current income tax owed: $37,161.50
- Under Trump tax plan: $30,375.00
- Current income tax owed: $67,549
- Under Trump tax plan: $59,525
- Current income tax owed: $135,429.50
- Under Trump tax plan: $129,525.00
Under the Trump tax plan, it’s a good time to be married!
There are still many questions to be answered — and Congress still has to do the dirty work of passing specific legislation — but the clear takeaway from the skeleton version of the Trump tax plan is that it’s a big win for working and middle class families.
Photo credit: 401(K) 2012 via Flickr, CC BY-SA 2.0