Trump’s New Tax Plan – What to Expect

The new tax plan President Trump and Congress have proposed seems to offer an assortment of pros and cons for individuals and families. Even as it is ever-changing, some will see higher taxes; some will experience lower taxes overall. But still, the effects depend greatly on the taxpayer’s situation.

Here we try to summarize the net effects among various groups by filing status or income because the proposed changes turn “apples and oranges” into “grapes and grapefruits!” However, here are some examples of the potential effects. Let’s consider the effects on single filers, married filers without children, and married-with-children tax return filers:

Single Without Children

The current “standard” deduction for someone filing single without children is $6,350. The televised news outlets report that, under the new tax plan, the deduction will almost double to $12,000 1. This is misleading, as the current system includes a $4,050 personal exemption. That personal exemption, added to the standard deduction, offer these tax filers a tax “write-off” of exactly $10,400. This new tax plan offers a new “single deduction,” which combines the two items, but increases the “write-off” amount by $1,600. This changes that total deduction amount from $10,400 to $12,000.

Let’s figure a simple net tax effect from this new, single deduction. Multiply a person’s tax rate by the $1,600 greater deduction (above) to see that person’s actual tax savings. Most single taxpayers with no children fall between the tax brackets of 15% to 25%. For most in this category, this new deduction creates a per-person tax savings of $240 to $400 per year.

Married Without Children

A similar result happens for taxpayers who file married with no children. We have been told that the standard deduction increases from $12,700 to $24,000. The standard deduction, now $12,700, combined with the $8,100 of personal exemptions, currently allows a combined deduction from income of $20,800. Under the proposed plan, the new “single deduction” increases that combined amount by $3,200, to $24,000, basically twice the result for singles.

Most married taxpayers, filing jointly but with no children fall between the tax brackets of 15% to 25% (couples with taxable income between $18,650 to $153,100). For most in this category, this creates the exact same tax savings of $160 to $400, per-spouse, per year.

Married With Children

Based on this part of the proposed plan, the previous two groups seem to have a per-person tax savings ($160 to $400) per year. However, for seemingly the majority of families in the Western Suburbs (DuPage County, as an example 2), nearly two out of three homes were composed of married taxpayers with children. And this group would see a different result under this component of the plan.

For a married couple filing jointly, also with two children, their deduction would actually decrease. But by how much? And what is the effect?

Well, the married couple’s standard deduction ($12,700) combined with a $16,200 personal exemption (that is, $4,050 each for 4 people), equals a total deduction of $28,900. However, the tax plan proposes a new “single deduction” for this group of $24,000. This is the same $24,000 single deduction that we saw for the “married, no kids” group.

But this time, the plan creates a loss of deduction of $4,900, per year. Now considering that this example family is also within the 15% to 25% tax bracket group. The yearly net effect is $735 to $1,225 of greater tax per household, or a tax increase of $367 to $612 per spouse.

There is, however, a $600 increase in the child tax credit, plus a new $300 credit for each parent and non-child dependent. The proposal intends for this credit to offset the tax increase to this group. We have not yet seen the details of these items.

Change in Tax Rates

The tax rates would also change – some would decrease, some just the opposite.

Most single taxpayers with no children currently fall between the tax brackets of 15% to 25%. The proposed plan would fold most of that 15 % to 25% group into a flat 12% group rate. Fortunately, that offers a 3% to 13% tax rate reduction to most of that group! Great!

But unfortunately, there is another smaller group within that new 12% rate. These are the people currently paying 10% tax. This proposed tax rate change creates a 2% tax rate increase to the very least earning American taxpayers, like students, disabled, and elderly.

Nearly almost all other individuals and families, no matter the filing status, who currently pay between 25% to 28% will have a tax rate that reduces to (or remains at) 25%.

From this 25% tax rate change, very affluent families, with up to about $260,000 of taxable income, can save up to $3,000 annual tax. Modest, but it still represents a savings.

However, for those Western Suburb families, whose taxable incomes fall between $77,000 to $150,000 per year, they will see no savings at all. Absolutely $0.

Other

Under the plan, several other deductions that many middle-class families count on will now be eliminated. This includes:

  • The state and local income tax deduction, which primarily helps homeowners, and those living in states with higher taxes.
  • Also to be reduced (or possibly eliminated) is the student loan interest deduction. This does not reduce or eliminate student loans, just the tax write-off for loan payments.
  • The mortgage interest deduction will be cut in half. Obviously, this is one of the great incentives for owning a home with a mortgage. That common benefit for homeowners will be slashed in half.

Written By: Shavonne Taylor and J Anton Collins. Ms. Taylor is a Tax Case Analyst and frequent blogger with Tax Law Offices. Attorney Collins formerly worked with IRS, and is a specialist in tax problems for business owners. If you are in need of an IRS tax lawyer to guide you, please reach out to us today! We look forward to working with you.