Trump's Tax Plan Is Here. This Is What It Does.
Wednesday, President Trump and Republican lawmakers released the clearest picture yet of their tax reform plan. While the plan still leaves many details to the imagination, it fills in crucial gaps that had yet to be explained. Here's what you need to know.
Increasing The Standard Deduction
Under the Trump tax plan, the standard deduction would be increased to $12,000 for individuals and $24,000 for couples filing jointly. Last year, deductions were $6,300 for singles and $12,600 for jointly filling couples.
Republicans have widely touted this as "doubling" the standard deduction, but Business Insider points out that the plan eliminates the "personal exemption," a $4,050 credit given out per person. With this included in the equation, deductions would only increase by around 15%.
Let's say you are single with no dependents, and you have a moderate income. Currently, you get to take the standard deduction ($6,350) and one personal exemption ($4,050). If you are 65 or older, you also get to take an additional standard deduction ($1,250). That adds to $10,400, or $11,650 if you're a senior citizen.
The Republican plan would replace all these provisions with a single deduction of $12,000 ($24,000 for married couples.) That's a 15% increase — except for seniors, who get a 3% increase.
Three Tax Brackets
Trump's tax plan will consolidate the current seven tax brackets (10%, 15%, 25%, 28%, 33%, 35% and 39.6%) into three (12%, 25% and 35%). The plan opens the possibility for a fourth bracket above 35% to keep the plan "at least as progressive as the existing tax code."
The plan does not outline the income breakdowns of the brackets.
Those Going From 10% To 12%
The plan states that people moved from the 10% to the 12% tax bracket will not actually pay higher taxes, but its explanation of where their relief will come from is vague.
The Child Tax Credit, currently set at $1,000, will apparently increase "significantly" and apply to a wider breadth of incomes.
The plan also says "additional measures" will be created to "reduce the tax-burden on the middle class."
Goodbye Deductions
All itemized deductions, except for mortgages and charitable deductions, would be eliminated under the plan. Itemized deductions are more specific deductions based on expenses that are largely used by the upper and upper-middle class to reduce tax burden.
Goodbye AMT
Trump's tax plan also eliminates the AMT, a tax imposed on the wealthy who try to take a lot of deductions. Generally, those making $300,000 or more are subject to the tax because they take large deductions.
According to The New York Times, the AMT has lost popularity in many circles:
The minimum tax has gone through several iterations, but the essential intent has not changed: to limit the amount of deductions available to the richest Americans. Over the years, though, inflation has eaten away at its effectiveness — as has the exclusion of interest and dividend income, which insulates the richest Americans.
About 30 percent of households earning $200,000 to $500,000 in 2016 are being hit by the minimum tax, as are 63 percent of those earning $500,000 to $1 million, according to calculations from the nonpartisan Tax Policy Center in Washington. But only a fifth of the total earn more than $1 million and face the minimum tax.
Rich Business Owners Will Pay Fewer Taxes
The Plan would give a reduced tax cap of 25% to owners of "pass-through companies," partnerships or LLCs oftentimes created to avoid corporate or personal tax rates. This allows the rich, who would pay a higher individual tax rate of 35% on their income, to instead pay a much lower rate.
As Dylan Matthews writes for Vox, this change would be a massive win for Trump's companies:
The Trump Organization isn't a "C corporation." It doesn't pay corporate income tax. Instead, it's structured as a collection of pass-through enterprises, so the vast majority of income accruing to Trump and his family is taxed through this system. Trump almost certainly pays the 39.6 percent rate on his earnings, so he's cutting his own top tax rate by [almost] half.
[Vox]
Corporate Bonanza
The plan would also slash taxes for the word's richest corporations, reducing the corporate tax rate from 35% to 20%. President Trump has called the number "a red line" and "perfect."
Additionally, the plan would allow corporations to write off capital spending for at least five years.
'America First'
Foreign income made by US companies will no longer be taxed and untaxed US income oversees will be taxed at various rates based on what form it's in (cash, stock, capital etc.)
It's unclear how the US will prevent companies from moving operations overseas to generate untaxed foreign income.
