8 Things You Need to Know About the Trump Tax PlanSubmitted by HearthStone | Private Wealth Management on October 10th, 2017
8 Things You Need to Know About the Trump Tax Plan
As lawmakers in Washington shift their focus toward possible tax reform, there are eight top things you need to know about the proposed Trump Tax Plan. It’s still early in the process and we won’t know the actual changes, if any, for some time.
This article is based on Congress’s “Unified Framework,” drafted as a starting point and released on September 27, 2017. You can download the complete copy here (PDF). We’ll update this article periodically as things become clearer.
1. Increase the standard deduction from $12,700 to $24,000 for joint filers, and from $6,350 to $12,000 for individual filers. This effectively eliminates income taxes on the first $24,000 of income earned by a married couple and $12,000 earned by an individual.
2. Reduce the current seven tax brackets (ranging from 10% to 39.6%) to three tax brackets of 12%, 25% and 35%.
3. Eliminate personal exemptions (currently $4,050 per person). The exemptions would be replaced by an enhanced child tax credit and a credit for non-child dependents. The phase out levels for these credits would be increased to offer more tax relief to the middle income earners.
4. Eliminate nearly all itemized deductions except for mortgage interest and charitable contributions. This includes elimination of the state income tax deduction, property tax deduction and medical expense deduction. For California residents, the loss of the state income tax and property tax deduction hurts. And, the loss of medical expense deduction could make a meaningful difference for tax payers who need a lot of medical care. But, the increase in the standard deduction will benefit many tax payers, especially those who don’t own homes.
5. Eliminate the Alternative Minimum Tax (AMT). The AMT requires all tax payers to compute their taxes twice. Eliminating the AMT will simplify tax filing. And it should also decrease the cost of preparing an income tax return.
6. Eliminate the estate tax and the generation-skipping transfer tax. Removing these taxes could change the current step-up of cost basis on death to a carry-over of basis to the heirs. Another change could be in the design and purpose of certain trusts away from tax avoidance toward other objectives.
7. Allow income from sole proprietorships, partnerships and S-Corporations to be taxed at a maximum of 25%. Currently these entities are taxed at ordinary individual income tax rates which can be as high as 39.6%.
8. The top tax rate for corporations would drop from the current 35% to 20%.
As with any tax reform there will be winners and losers. Who wins and who loses remains to be seen. In a recent interview with CNBC, one observer, Scott Hodge, president of the non-partisan tax policy research Tax Foundation said, “Even when you reduce the deductions that we get, and lower rates, the combination of these things will make most people much better off.”
There will be differences of opinion and heated debate on the topic. We’ll be sure to keep you informed on this development. As always, we will help you make informed and sound decisions considering these issues and other important considerations.
We’d like to thank Dean Gilger, CPA, of the Applied Tax Resource Group in San Diego for his assistance with this article.