Although it’s uncertain whether President Trump’s tax reform plan, announced September 27, will pass as it’s currently written, the current Administration and Republican-controlled Congress vow to pass some type of tax reform by the end of 2017. Even though the proposed changes are still in flux, it’s worthwhile to start thinking about the possible ways tax reform will affect you.
What Changes Might We Expect?
According to the nonpartisan Tax Policy Center, some of the changes would:
- Collapse the seven individual income tax rates to three (12, 25, and 35 percent)
- Increase the standard deduction
- Eliminate personal exemptions
- Increase the child tax credit
- Eliminate most itemized deductions
- Repeal the estate tax, and
- Reduce the corporate tax rate from 35 to 20 percent
Taxpayers would only be able to claim the increased standard deduction if they don’t itemize deductions. The plan also eliminates many current deductions, like those for state and local taxes.
How Tax Reform Might Affect Individual Taxpayers
So how will all of this affect individual taxpayers? As with the current tax code, the answer depends on many variables. For example, a middle-class earner might think the new increased standard deduction will mean they will pay lower taxes. However, say that person used to be able to claim the Head of Household exemption, plus deductions for each child, as well as a deduction for state and local taxes. Then they will likely lose some deductions and pay more taxes under this new plan.
Again, the proposed changes to consolidate the current seven income tax brackets to three–12%, 15% and 35%–would result in either savings or paying more taxes depending on a number of factors. Chiefly, it will depend on the income threshold for each bracket, which has yet to be announced.
In general, almost all reviewers of the changes, nonpartisan outlets as well as those on both the right and left sides of the political spectrum, agree on one thing. The taxpayers who will save the most money under this new plan are the wealthiest bracket of taxpayers. Those earning more than $730,000 will see the biggest savings with 8.5%. Meanwhile, those in the lowest bracket, who earn up to $25,000 a year, will see a savings of .5%. That is, someone who earns $732,800 will get a tax cut of $146,470 while someone who earns $25,000 will get a tax cut of $90.
What Happens Next
Just over a month after being announced, the proposed tax plan is receiving criticism from both Democrats and Republicans. So it will likely change significantly before it affects the tax code. It’s a good idea to follow its progress through 2017 and into next year. If you have any questions about steps you can take now, even though things are undecided, we’re always here and ready to answer your questions about taxes.