How Trump’s Tax Proposals Would Affect Individuals

Mar 2nd 2017
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The centerpiece of President Trump’s tax plan, as described on his website during his candidacy and in other communications, is a restructuring of the current tax rate system. But other significant reforms for individual taxpayers also are on the table.

Here’s a sampling of the key proposals:

Individual tax rates. Both Trump and the House GOP would replace the current seven-bracket system – featuring a low rate of 10 percent and a high rate of 39.6 percent – with a three-bracket setup of 12 percent, 25 percent, and 33 percent. Although the House GOP was silent on the thresholds in the tax blueprint it issued last year, Trump’s plan cuts off the brackets at $37,550 and $190,150 for single filers and $75,000 and $225,000 for joint filers.

To further simplify tax filing, head-of-household rates and the onerous alternative minimum tax would be completely repealed.           

Itemized deductions. Trump has said he would keep most itemized deductions, but he would impose dollar limits on total deductions of $100,000 for single filers and $200,000 for joint filers.

In contrast, House Republicans have pledged to eliminate most of the deductions, other than ones for mortgage interest and charitable contributions, as well as preserving some tax breaks for retirement and college savings.

In any event, the current “Pease rule” restricting itemized deductions would be rendered obsolete.

Personal exemptions/standard deduction. The president has proposed a repeal of personal exemptions in another move aimed at tax simplification. Trump would combine personal exemptions and the standard deduction into a single deduction of $15,000 for single filers and $30,000 for married couples.

Similarly, the House GOP plan consolidates personal exemptions and the standard deduction into a single deduction of $12,000 for single filers, $18,000 for individuals with a child, and $24,000 for married couples.

Investment income. Trump would retain the existing tax rules for long-term capital gains and qualified dividends. Currently, the maximum tax rate is 15 percent, or 20 percent for those in the top ordinary income tax bracket (zero percent for those in the two lowest tax brackets).

Conversely, the House GOP has proposed taxing only 50 percent of investment income – including capital gains and qualified dividends – at ordinary income rates. Thus, the top tax rate on investment income would effectively be 16.5 percent.

In addition, both Trump and Republican leaders would repeal the 3.8 percent tax on net investment income (NII). The NII tax was enacted as part of the Affordable Care Act.

Childcare expenses. In the past, Trump has proposed a number of tax reforms relating to childcare expenses of parents, some of which he has tweaked over time. This includes the following provisions:

  • An above-the-line deduction for dependent-care expenses for children under age 13, subject to a phase-out based on income.
  • A new type of savings account for dependent-care expenses where contributions of up to $2,000 a year would be deductible and growth within the account would be tax-free.
  • Enhancements in the current tax rules for employer-provided childcare expenses.
  • An increase in the Earned Income Tax Credit (EITC) that allows low-income families to receive certain rebates through the EITC.

By and large, Republican leaders in the House prefer to improve and consolidate the tax benefits already available to parents, rather than creating any new ones.

And this is just the tip of the iceberg. Numerous other changes for individual taxpayers would be required to accommodate and supplement these provisions.

Assuming that Congress is able to agree on even some modifications this spring, the Form 1040 your clients will file in 2017 will likely look radically different.  

Related articles:

A Tax Professional’s Take on Trump’s Tax Plan
What Does Trump’s Presidency Mean for Tax Reform? 
Trump’s Victory Could Lead to Big Tax Law Changes
Factors Working for and Against Trump-led Tax Reform

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