The debate surrounding tax reform is on par with the one around healthcare and now President Trump and the GOP have a chance to push their version of tax reform forward.
As you may know, earlier this week, President Trump and the “Big 6” Republican leaders announced their long-awaited tax plan. In it, they set the following goals for the proposal:
- Tax relief for middle-class families
- Added simplicity, resulting in a “postcard-size” filing for most Americans
- Tax relief for business, particularly small businesses
- The closing of special-interest tax breaks and loopholes
The proposed changes fall neatly into three categories. Here’s what they are as well as some idea of what to do about it now:
1. Individual Tax Changes
The seven tax rates currently applied to ordinary income – ranging from 10% to 39.6% – would be consolidated into three brackets: 12%, 25% and 35%. No detail was provided regarding the income levels at which each bracket would begin and end, however.
In addition, the framework reserved the possibility that a fourth bracket – a top rate in excess of 35% – could later be added.
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The standard deduction – currently at $6,350/$12,700 (single/married filing jointly), would be nearly doubled, to $12,000/$24,000. All itemized deductions other than the deductions for mortgage interest and charitable contributions would be eliminated. The combination of a higher standard deduction and eliminated itemized deductions would cause approximately 27 million more taxpayers to claim the standard deduction when compared to current law.
Personal exemptions – the $4,050 deduction each taxpayer is entitled to for oneself, a spouse and any dependents – would be eliminated. The framework provided that these lost deductions would be rolled, at least in part, into an additional child tax credit, though only $1,000 of the credit would remain refundable, as is the case under current law. In addition, a new nonrefundable $500 credit would be enacted for non-child dependents, such as an elderly parent.
Lastly, the alternative minimum tax, estate tax, and generation skipping tax would be eliminated.
What to do now?