How Trump’s Tax Plan Will Affect You

Who knew that Trump's tax plan actually is going to same most people money on their income takes?Whether you love Donald Trump or whether you are booking your flight to Canada, there’s no getting around that he has officially been voted into the Oval Office.

I think everyone was surprised to see him win and that is okay, but now that he has I am curious to explore some of what lies ahead with his presidency.

This is no way an endorsement of Trump or his tax plan, but rather an explanation of his plan based on the current info that we have.

All that said, most of us can agree that the US tax code is in serious need of reform. And given the lackluster state of the economy, a tax cut of some sort is probably long overdue and will be welcomed by many.

Time will tell, but Trump’s tax plan might accomplish both goals: simplification and lower taxes.

So the real questions are, what are the details of the tax plan, and how will it affect you?

Let’s try to address both questions based on the information that we currently have about the tax plan.

Individual Income Taxes

The Trump Tax Plan will generally lower income tax rates, while completely eliminating certain other tax categories.

Tax Rates

With the Trump Tax Plan, the number of income tax brackets will be reduced from seven down to just three:

  • Income less than $75,000 for married filing jointly (or $37,500 for single filers) – 12%
  • Income greater than $75,000 but less than $225,000 for married filing jointly (or between $37,500 and $112,500 for single filers) – 25%
  • Income greater than $225,000 for married filing jointly (or more than $112,500 for single filers) – 33%

Notice that in each of the three brackets, the applicable income for single filers is exactly half that of those who are married filing jointly. Under current tax law, the tax brackets are 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.

Under this change, most taxpayers – but not all – will be subject to lower marginal income tax rates.

Capital Gains Tax Rate

Under the Trump plan, the current capital gains rate will be retained. That means that the capital gains tax rate will top out at 20% for investment assets that have been sold after being held for more than one year.

Alternative Minimum Tax (AMT)

The AMT is a provision in the tax code that adds back certain tax preference items into your adjusted gross income. It is designed to impose a tax on wealthy individuals who may minimize or eliminate their tax liability through the use of certain deductions and loopholes.

The problem with the AMT is that it is not indexed for inflation. That imposes “bracket creep” in which many middle-class taxpayers are now subject to the additional tax.

The Trump Tax Plan proposes to eliminate the AMT.

Obamacare Tax on Investment Income

This is a tax that was included in the Affordable Care Act, a.k.a., Obamacare, that imposes a 3.8% tax on investment income received by high income taxpayers. It was established to partially fund the Act.

This tax will also be eliminated under the Trump Tax Plan.

Death Tax, or Estate Tax

Under current tax law, an estate tax of up to 40% can be charged on estates that are valued at more than $5.45 million.

Under the Trump Tax Plan, this tax will generally be eliminated. However, the new plan will be subject to capital gains held until death and valued at over $10 million. In addition, contributions of appreciated assets into a private charity created by either the decedent or the decedent’s relatives will be disallowed.

Individual Deductions

There will be significant changes on this front as well, and most will benefit the average taxpayer.

Standard Deduction

Under current tax law, the standard deduction for a married couple filing jointly is $12,600, and for single filers, $6,300 (both for 2016). Under the Trump plan, the standard deduction will increase to $30,000 for married couples, and $15,000 for single filers.

Personal Exemptions

Under current tax law, taxpayers can deduct $4,050 for each member of the household (taxpayer, spouse, and eligible dependents). Under the Trump plan, personal exemptions will be eliminated. The general idea is that they will be included in the higher standard deduction. If you are single and earn $50,000 – on which only $35,000 would be taxable after taking the $15,000 deduction – your marginal tax rate would be 12%. That’s better than the 25% marginal tax bracket that it would be in under the current tax code.

Head of Household Filing Status

This tax filing status will be eliminated under Trump’s proposal.

Limitation on Itemized Deductions

Under the Trump Tax Plan, itemized deductions will be capped at $200,000 for taxpayers who are married filing jointly, and $100,000 for single filers.

For what it’s worth, the current tax system also provides for the phaseout of itemized deductions beginning with an income of $259,400 for single filers, and $311,300 for married filing jointly.

Child Care Deduction

Under Trump’s tax proposal, you will be entitled to take an “above the line” deduction (applies even if you don’t itemize) for children under the age of 13. The deduction will be capped at the state average for the age of the child, and also for eldercare for a dependent.

The deduction will apply to incomes of below $250,000 for single filers, or $500,000 for married filing jointly. According to the plan, working and middle-class families will see the largest percentage reduction in the amount of their taxable income because of this deduction.

The exclusion will apply to families who use stay-at-home parents or grandparents, as well as paid caregivers. There will be a limit of four children per taxpayer, and the eldercare exclusion will top out at $5,000 per year, but will be indexed to the rate of inflation.

Childcare Rebate

The plan would offer spending rebates for childcare to certain low income taxpayers through the Earned Income Tax Credit (EITC). It would be equal to 7.65% of the remaining eligible child care expenses, and limited by a cap equal to half of the payroll taxes paid by the taxpayer. It would be based on the income of the lower earning parent in a two income household.

The rebates will be available to single taxpayers earning $31,200 or less, or to married couples filing jointly on incomes of $62,400 or less.

Dependent Care Savings Accounts (DCSAs)

These are special savings accounts that can be set up for the benefit of specific individuals, which includes unborn children. All taxpayers will be eligible.

Contributions will be limited to $2,000 per year from all sources, including the account owner, immediate family members, or the employer of the account owner. The government will provide a 50% match on contributions by parents of up to $1,000 per year per household. Parents will be able to check a box on their tax returns that will create a direct deposit of any portion of their EITC into their DCSA account(s).

Both deposits and earnings will be free from taxes, and unused balances can be rolled over from one year until the next. Once the child reaches 18 the funds in the account can be used to pay for education related expenses.

Business Income Taxes

This is a tax change that Donald Trump often discussed during the campaign and in the debates. While it’s likely that most people interpreted the reduction in the business income tax rate as applying to large corporations, it actually applies to small businesses as well.

Under the Trump Tax Plan, the business tax rate will fall from the current level of 35% (the current top corporate tax rate), down to 15%. The plan will also eliminate the corporate alternative minimum tax. This rate is available to all businesses, including corporations, sub-chapter S corporations, partnerships and sole proprietorships.

That rate will be available to all businesses, including small businesses, and will apply to profits that are retained within the business.

It also provides a one time 10% tax rate on corporate profits held offshore that are repatriated back into the US. This is an obvious aim at getting large, multinational corporations to bring their capital back into the US.

Business Tax Deductions

The Trump Tax Plan eliminates most corporate tax expenditures, except for the Research and Development Credit.

There is however an attractive incentive with depreciation. While most business assets must be depreciated over several years under the current tax code, under the Trump plan, firms engaged in manufacturing in the US can expense capital investment in the year that it is incurred. However if they do, they will also lose the deductibility of corporate interest expense.

How Will the Trump Tax Plan Affect You?

Assuming they are implemented in a form that is reasonably close to what the plan offers, how will you be affected? It really depends upon your income situation, but it does appear that most people will get some tangible benefit.

If you are a single…

For example, if you’re a single person who takes the standard deduction, you will be able to deduct $15,000 from your taxable income. That’s considerably better than the $6,300 standard deduction under the current tax code, plus the $4,050 personal exemption, which together total $10,350.

If you are married with 2 kids…

If you are married filing jointly, have two dependent children, and earn $100,000 per year, only $70,000 will be taxable after taking the $30,000 standard deduction. Since your taxable income will be under $75,000, your marginal tax rate will be 12%.

Under the current tax code, you would only be able to deduct a total of $28,800, leaving you with a taxable income of $71,200. (The deduction is comprised of the standard deduction of $12,600, plus $16,200 for four personal exemptions at $4,050 each.) Your marginal tax rate would be 15%.

This means that you will save on taxes on two fronts – with a slightly lower taxable income, and a lower marginal income tax bracket (15% vs. 12%).

If you are a small business owner…

If you own a small business, you will benefit even more. If your business provides you with a net profit of $150,000 per year, the current tax code would have you paying a marginal tax rate of 25%. But under the Trump plan, your marginal tax bracket would be limited to the unified business tax rate of 15% on business income.

If you are married with 4 kids…

Not everyone will benefit however. Taking the example above of a couple married filing jointly, earning $100,000 per year, they will actually lose a bit if they have four children instead of two.

Four children will mean that there are total of six personal exemptions, for a total of $24,300. When added to the standard deduction of $12,600, deductions will total $36,900. This is significantly higher than the Trump standard deduction proposal of $30,000. It would result in an additional $6,900 of taxable income.

However, it is still possible this couple will pay less in taxes overall, since the income tax brackets in the Trump plan are lower than what they are in the current tax code.

On balance, it appears that Trump’s Tax Plan will benefit the majority of taxpayers.

And given the combination of simplicity, lower tax rates, and significantly lower taxes for businesses, I am cautiously optimistic that it will also help the economy as a whole as well.

We shall see…

What are your thoughts about Trump’s Tax Plan?

(Sources: The Trump Tax Plan and President Trump: What Does It Mean For Your Tax Bill? )

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27 Comments
  1. Cindy

    If taxes are cut what services will be lost? Home delivered meals to seniors, head start, Pell grants, WIC, Medicaid, Extra Help for drugs for Medicare beneficiaries, funds for schools? Eliminating the Estate Tax will save the 1%, like Trump, more than I would make or own in 100 lifetimes. Everybody likes to pay less tax, but children, families, seniors and the disabled need a safety net.

    • DebE

      You are absolutely correct. We learned from the past that tax cuts for the rich do not work. Trump only cares about his elitist self and his cronies.
      Tax rates on the wealthy should be closer to 70% or even more.

    • Carolyn

      Thank you, Cindy; I couldn’t agree with you more. In addition to Medicare and Medicaid, we also need access to healthcare for everyone. A Medicare-for-all plan would probably work best. But I am very much afraid that Donald Trump will enact policies that will cause people to lose access to affordable health care. People will die because of this, just so people like Donald Trump can avoid paying taxes.

      I am 63 years old, retired, and on Obamacare. The amount of income taxes (state and local) I paid during my career is more than twice the amount I paid for my home. I don’t think it’s too much to ask that the government ensures I can have access to affordable (not free) healthcare.

    • Bob

      Completely agree Cindy – it has to come from somewhere, or the national debt is going to get a LOT bigger!

    • Amy

      I see what you are saying, however, I respectfully ask that you take a moment and look at the other plans he has beyond just the tax plan. This is one plan he has, it’s not final and will probably be tweaked. But, his other plans, assuming they pass and work, will help fund the very programs you inquired on.
      To the one who commented that the rich should be taxed 70%, please take a moment and think about that. No. I’m not rich. I have a 4 yr degree and make less than 30k a year. But, a Greta many of the wealthy in this country have actually worked harder than we’do like to admit. A 70% tax would effectively shut down our economy because everyone subject to that would leave the country and take their companies (and our jobs) with them.
      Folks ,he’s not in office yet, let’s at least give his ideas a chance before we bash them.

    • Christina

      Really? The wealthy should pay 70% tax? So basically you want to punish people for being successful. Ok. Got it. I’ll keep that in mind with my small business… stay small and commit to the least amount of success to make sure I don’t have to lose almost 3/4 of my income. Thanks.

  2. Teeps

    The estimates are around $4.8 TRILLION for the cost of Trump’s tax plan. That’s just his tax plan. That’s not including how much repealing Obamacare will cost, how much increased military spending he’s planning, etc.. etc.. Think about home much the right lambasted Obama over the deficit/debt and let that sink in for a minute.

  3. Mike

    will we still be remanded for not having health insurance? Seeing has some of us can’t afford to pay for it. I would like to know if I am getting a tax return w/ my wife or is I.R.S. going to take it again?

    Mike.

  4. Laura

    What a wonderful article Bob, thank you for taking the time to lay everything out like this!

    • Bob

      You are welcome Laura!

  5. Tisha

    Thanks Bob for sharing this… I always look forward to the positives that you share with everyone.

    • Bob

      Always looking for that silver lining Tisha 😉

  6. Jeff Leinard

    Does anyone realize that the largest tax income the government ever had was not during a tax and spend president ‘s term but during the much bashed Bush tax cuts? If both sides got their heads out of their politics for a moment and looked at different topics objectively, maybe we could see good ideas from both the elephants and the donkeys. Trump has not even taken office yet and the majority of the comments are so very negative I had to force myself to read them. Give the man a chance. And by the way I voted for Trump, but was saying give the man a chance when our current President took office.

  7. Nessa

    Thanks for sharing this! We are excited for the 15% tax for businesses! The government should give businesses a break- they are helping the economy! My husband owns a small business and I truly believe a lot of people have NO idea what it takes. We have invested so much time, money, energy, prayers, and tears to keep an American dream going. We now currently employ 18+ people. He has created jobs and is keeping food on the table for other families as well as his own. After 10 years of hard work all of our friends think we are making out like bandits… if only they knew my husband was at work 80-100 hours a week, how much payroll taxes were, and that my husband actually makes a little less salary than one of his employees to keep more money in the business so we can always pay our employees and vendors. Regardless of what someone makes, 70% tax for anyone is absolute ludicrous. We live in a townhouse and are expecting a 3rd baby and honestly if it wasn’t for Christian healthcare and Trump’s election, we would have less drive to continue this “American dream”. It would be a lot easier for him to go to work at an unenjoyable 9-5 job for someone else, pay less taxes and not have all this stress. But the feeling of accomplishing goals, helping others and his family is definitely a reward that is worth all the risk that business owners take. God bless America, and help keep us united!

    • Bob

      Me too! 15% will help me hire more people, thus creating jobs. Hopefully it will do the same for other small businesses as well!

    • JS

      Small business hires 80% of the U.S. work force. The current tax rates stifle growth – period. Trumps plan will allow small businesses to flourish and grow. Those who attempt to put a cost to his plan do not take into account the massive positive impact that a 15% tax rate will have on the growth of businesses. It is huge. For those of you who have never owned a business, I will make it simple. If a business makes 1 million dollar profit for a fiscal period, the government wants their payment immediately. If you are a California business, this equates to 390k to the Fed, and 130k to CA , for a whopping tax bill of 520k – Over 50% of the profits. If you do the math, that leaves 480k. But not so fast. A business survives on “cash flow”, which is the available cash on hand to pay expenses like rent and electricity. The problem is that if I show a 1 million dollar profit on my books, that does not mean I have 1 million dollars in the bank. I may have 20-30 percent of that tied up in accounts receivable which is a fact for most businesses – especially given the fact that most suppliers and vendors have moved from 30 day terms to 60 day. So now that leaves me with 120k of cash flow. I also have inventory sitting on the shelf. This could be at least 10%. Now I have no cash to pay my employees, let alone my bills and stay in business, even though I made 1 million dollar profit. That is how crushing the current tax code is. Forget about growth.
      A tax reduction to small business will be huge and the economic benefits will be massive to jobs and our economy. I do not believe that any of the so-called experts who have analyzed the impact have taken much of this impact into account. It cannot be quantified but it will surely be massive.

  8. Liz

    As a single parent, eliminating the head of household filing status and raising the lowest tax bracket hurts. On top of the tax changes in my state that hurt both lower income parents and small business owners, it doesn’t give me a lot of hope.

  9. Dave

    There are always winners and losers with regard to tax reform. My wife and I have 3 kids, so our combined amount that is not subject to tax will drop (since personal exemptions are proposed to be eliminated). Our tax rate will also go from 10% to 12%. I make $40,000 a year, so our taxes will go up. Thankfully, it looks like I will retain the Child Tax Credit, and Earned Income Tax Credit. So we actually receive money from the government after we file our taxes. As a Conservative politically, it feels a little awkward, but it has enabled us to send our kid’s to a small Christian school that we founded, and has helped us employee people through the school.

    • Bonnie

      Whether your taxes go up really depends on how much the child care deduction is worth if your kids are under age 13.

  10. Jenny

    Bob, am I understanding correctly that the Earned Income Tax Credit, which currently allows low income families with dependents to often get an extra refund on top of what they may have paid in during the year in federal taxes?

    • Bob

      Hey Jenny, I don’t exactly understand your question, but regardless I would probably suggest checking with your tax preparer once the changes have been implemented –

  11. Lisa

    Bob, you do not even mention the impact of the loss of Head of Household filing status on single parent families. This tax plan targets single parents, mostly single moms, and creates a very large increase in taxes for working, middle class single parents. Why would you write this article and not even acknowledge this impact?

    • Lauren (SeedTime Editor)

      Hey Lisa – sorry we didn’t address your concern directly but the proposal is all we know that this point so we just wanted to get the facts out for our readers. It is only a proposal at this point so time will tell what the final tax plan looks like and how it will directly impact single parents.

  12. Deborah

    What does this mean for single parents? I don’t see myself anywhere in this plan. Could you please address that? I’d like to understand what that means for my family.

    • Lauren (SeedTime Editor)

      Hey Deborah – Under Trump’s proposal, the Head of Household Filing Status will be eliminated. So time will tell with what the final tax plan looks like and how it will directly impact single parents.

  13. Kerry M.

    I appreciate that someone is finally discussing the impact this plan will have on large families. However, I still don’t think this article goes far enough into the discussion of large families.

    I still haven’t seen any discussion regarding the child tax credit and whether it will remain. Additionally, capping out the dependent care expense at 4 children, is also offensive to someone like me, with seven children.

    The combination of my itemized deductions (34k) and exemptions (36k) will be over 70k this year (I understand his plan wouldn’t go into effect until another tax year). With his plan, I would still get to keep my 34k itemized deductions since it exceeds the 30k minimum, however, I won’t get anywhere near the full affect of the 9 personal exemptions.

    I wasn’t clear whether the dependent care expense deduction was available to anyone with children, even those who don’t pay the expense. And does it cap out at 5,000 or was that just the elder care expense?

    thanks
    Kerry

  14. princevinco

    God’s way is never our way, so God may have chosen Trump to better the life of the citizens of America