Last week, President Trump released his proposed tax plan to reform income tax in America to fulfill a campaign promise. This has left many news agencies and financial experts analyzing the plan to determine its efficacy — and how it will impact the average American. Although any finalized tax plan will most likely look much different than President Trump’s proposal, since it must pass through both the House and Senate, let’s take a look to see what you should know about its potential impact on you.
Known as the Unified Tax Reform Framework, this tax reform plan includes many components:
- Lowering the corporate tax rate
- Doubling the standard deduction for individuals
- Elimination of personal exemptions
- Cutting income tax rates
- Changing the income tax brackets
This plan includes parts from President Trump’s campaign plan, known as the “Five-Part Tax Plan” and a preliminary plan he outlined during his first 100 days in office. If passed, this proposal will become one of the biggest tax reforms in decades.
The Proposed Tax Brackets
The plan proposes to simplify the tax bracket through reducing the current seven brackets to just three. Additionally, most tax brackets will see a decrease in the income tax rate, although the exact difference depends on your current bracket and the one into which you move.
Those in the lowest tax brackets, who currently pay between 10 and 15 percent, will now pay an income tax of 12 percent, although they will not have any tax on capital gains. The proposed bracket includes those who make up to $37,500 for a single filer and $75,000 as a joint filer.
The second tax bracket includes those who make between $37,500 and $112,500 for single filers and $75,000 and $225,000 for married filers. In the current bracket, this group generally pays between 25 and 28 percent of their income in taxes. In the proposed tax reform, they would pay a 25 percent income tax and 15 percent capital gains.
The third bracket, which includes those who make more than $112,500 for single filers and $225,000 for joint filers, will have a 35 percent income tax and 20 percent capital gains tax, compared to 28 to 39.6 percent in the current tax rate.
Changes to Deductions and Credits
Everyone will benefit from an almost doubled standard deduction, which will raise the standard individual deduction from $6,300 to $12,000 and $12,700 to $24,000 for single filers and joint filers respectively. However, many itemized deductions will be eliminated, other than charitable donations and mortgage interest. There might also be simplifications on retirement benefits. There are no deductions for local and state taxes.
A major impact for most middle class and lower income families is that there will no longer be any personal exemptions. This is the part in the tax where you could deduct $4,050 from your income for each of your dependents, including your children. Therefore, even with the increased standard deductions, families with several children will end up with much higher taxes. However, there will be an increased Child Tax Credit, with an increase in the maximum tax level and removes the marriage penalty, allowing more people to take it. You can also get a $500 credit for any dependents who are not your child, such as an elderly parent.
The proposed plan also removes the Alternative Minimum Tax, estate tax and generation-skipping transfer tax, which mostly impact those in the highest bracket of income. Businesses also benefit from the proposed reform, with the corporate tax rate lowering from 35 to 20 percent. There is also a reduced maximum tax rate for small businesses at 25 percent. However, this tends to help businesses with a greater income, since most small businesses do not high enough profits to qualify for the top tier, which means they won’t see much of the cuts.
There are other changes involved that affect businesses and corporations as well, such as losing the ability to deduct interest expense or expense the cost of depreciable assets. It also will not tax income coming from work that businesses conduct overseas, although there will most likely be a new foreign tax and a proposed one-time tax reparation for companies that bring work back to the U.S.
Impact on the Economy
Although this proposed plan might cut taxes for many, especially those in the top bracket, it does come with an increase of $7 trillion over the next 10 years for the National Debt, which has issues of its own, including increased interest rates and a weakening of the dollar. It might stimulate economic growth in the beginning, but it might be enough to offset the losses, and it will tend to slow as the years progress.
Because of the potential impact on the federal deficit, it will be difficult to pass this proposed tax reform. It will need as many votes as possible, especially in the Senate, which means it will need even the most fiscally responsible Republicans to sign on, as well as some Democrats, who are generally opposed to tax cuts that benefit the wealthy over the poor.
The Effect on Your Taxes
According to the Tax Policy Center, those who benefit the most from the tax cuts are the wealthy. They will see an 8.5 percent tax break. The poorest will see a tax break of 0.2 to 0.5 percent. Those in the lowest income bracket also most likely won’t benefit from the increased standard deductions or exemptions, because they have incomes that are much lower than the deductions.
So, how will it impact you? It depends on your current tax bracket and tax rate, as well as the size of your family, whether you own a business and other components that might complicate your taxes. For middle and lower class families with more than two children, there is a good chance you will end up paying more in taxes. In fact, the analysis released from the Tax Policy Center determined that the middle-class workers might see an increased tax burden of 28 percent.
No matter what happens politically, the tax law remains the saw for your 2016 tax returns and any previous returns. Therefore, there is no reason to procrastinate with submitting your return if you applied for the October extension. You also should not continue to hesitate to fix any tax debt or back taxes problems. They will only get worse, as the interest and penalty payments add up.
Take action today. Contact Fidelity Tax Relief and speak to one of our tax professionals about your situation. They will determine the best course of action, whether it is submitting a return, applying for an Installment Agreement, applying for Penalty Abatement or negotiating an Offer in Compromise. Find out more by calling 877-372-2520.