How Donald Trump's Tax Plan Affects Households
April 26 2017 - 4:29PM
Dow Jones News
By Daisy Maxey and Veronica Dagher
The Trump administration on Wednesday proposed a tax overhaul
that aims to simplify the system for individuals and households,
but would cut some popular deductions that could cost some
taxpayers -- particularly those in high-tax states.
The proposals, which largely keep with those President Donald
Trump made on the campaign trail, focused on two overarching goals
for individuals: tax relief for families, particularly
middle-income households, and simplification of the code.
Here are several of the takeaways:
Tax brackets
Mr. Trump called for cutting the number of tax brackets to three
from seven, proposing rates of 10%, 25% and a top rate of 35%,
which is below today's top rate of 39.6%.
That new top rate wouldn't apply to pass-through income, which a
business entity passes on to its owners; that rate would be
15%.
The White House didn't say what the income thresholds for these
rates would be.
Standard deduction
As part of the simplified brackets, Mr. Trump has also proposed
doubling the standard deduction for individuals. That change would
increase the deduction from the 2016 levels of $6,300 for single
filers and $12,600 for married couples filing jointly.
Doubling the deduction would greatly increase the number of
people who take the standard deduction, says William Reichenstein,
an investment professor at Baylor University.
But the plan is silent on personal exemptions, which were $4,050
for 2016. Repealing those, a part of Mr. Trump's campaign-trail
plan, would remove much or all of the benefit of the higher
standard deduction for households.
Other deductions
Under the plan, deductions for mortgage interest and charitable
contributions would be protected. The two deductions are among the
most popular for individual U.S. taxpayers, making them two of the
most costly for the federal government.
But the proposal aims to cut all other individual, including a
commonly used provision that allows state and local taxes to be
deducted from reportable income.
Increasing the standard deductions will reduce the number of
people who itemize their deductions and ease the pain of
eliminating some of the itemized deductions, says Robert Willens,
an independent tax expert.
But if the deduction for state and local income taxes is
eliminated, he says, "that would be a significant cut for those who
live in high-tax states, such as California, Illinois,
Massachusetts and New York."
Estate tax
Under current law, for 2017, the estate and gift-tax exemption
is $5.49 million per individual, up from $5.45 million in 2016.
Meaning: an individual can leave $5.49 million to heirs and pay no
federal estate or gift tax.
Mr. Trump would repeal the estate tax entirely under his
plan.
Jeffrey Levine, chief retirement strategist at Ed Slott &
Co., isn't surprised about the White House's plan to repeal the
estate tax, because Mr. Trump repeatedly vowed on the campaign
trail to repeal it. "Anything less than a full repeal would have
been surprising," he says.
The alternative minimum tax
This complex tax, which was created to keep wealthy taxpayers
from using loopholes to avoid paying taxes or greatly reducing
their burden, would be repealed under the plan and would amount to
a big simplification.
The tax has long been contentious as it wasn't indexed to
inflation before 2013 and affected an increasing number of
households each year as workers' incomes adjusted to inflation and
surpassed AMT eligibility levels.
Child care
The White House didn't share new details on tax relief for
parents, though published reports have indicated he would amend the
plans he promoted on the campaign trail.
Under the tax code currently, parents can claim each dependent
on their taxes, subject to certain income phaseouts.
Contributions to 401(k)s
Wednesday's proposal included no mention of a reduction in
benefits to contributing to 401(k) and similar retirement plans,
despite the possibility that adjustments to the pretax benefits of
such plans would be on the table.
Write to Daisy Maxey at daisy.maxey@wsj.com and Veronica Dagher
at veronica.dagher@wsj.com
(END) Dow Jones Newswires
April 26, 2017 16:14 ET (20:14 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.