Election 2016 has come and gone, and the United States has a new president. Along with a new president, we have many possible changes heading our way, including potential changes in the way we are taxed. The president does not create or change tax law – that is the domain of congress. However, with the president-elect’s party set to control both houses, it’s worth discussing some of Donald Trump’s proposed tax law changes, and their potential impact on you.
Trump’s proposed tax plan reorganizes the current seven tax brackets down to three. The lowest tax bracket (12%) would apply to taxable income of $75,000 or less. The middle tax bracket (25%) would apply to those with taxable income between $75,000 and $225,000. The highest tax bracket (33%) would apply to those with taxable income above $225,000. For single filers, the taxable income thresholds would be half (i.e. $37,500 and $112,500). When compared to the current tax tables, most would find themselves at the same rate or lower, with one notable exception: single filers with taxable income between $112,500 and $190,150. Currently, those taxpayers are in the 28% tax bracket. Under the proposed Trump plan, they would find themselves in the 33% tax bracket. It’s a small subset of overall taxpayers, but it’s worth noting. The Trump plan would also repeal the 3.8% Net Investment Income Tax (NIIT) and Alternative Minimum Tax (AMT), as well as eliminate the Head of Household filing status. Below is a comparison of current and proposed Trump tax rates for taxpayers filing Married Filing Joint.
Elimination of Head of Household Filing Status
The Trump plan would eliminate the Head of Household filing status, presumably pushing those filers into Single status. While this would result in a tax rate decrease for many, there is an exception. Due to the proposed bracket consolidation, former Head of Household filers with income between $112,500 and $210,800 would see a tax rate increase from 25% or 28% to 33%.
The proposed tax plan would increase the standard deduction for joint filers to $30,000, up from $12,600 currently. Single filers would see an increase to $15,000. These increases, though, come with a cost. Taxpayers would no longer be able to claim personal exemptions (currently $4,000 per exemption), which would potentially have a negative impact on filers with multiple dependents. For example, a single mother with two children would currently (2016) be able to take a standard deduction of $6,300, plus $12,000 in exemptions (herself plus two children = 3 x $4,000 exemption = $12,000). This would reduce her taxable income by $18,300. Under the proposed changes, she would only be entitled to a $15,000 reduction. That $3,300 difference, even at the lowest tax rate, would result in an additional $396 in taxes owed. A married family with four children, in the lowest tax bracket, would owe an additional $792. Conversely, a married couple with no children, in the lowest tax bracket, would see a reduction in tax owed of $1,128. This would not affect those with large incomes ($300,000 joint, $250,000 single), as they are currently phased out, and gain no benefit from personal exemptions.
Although not part of Trump’s tax plan, his stated intention to repeal Obamacare would have tax consequences. Under current law, those who do not have qualifying health care coverage may be required to pay the Individual Shared Responsibility Payment when you file your tax return. If Obamacare is repealed, it is assumed that this provision would be repealed with it, which would remove the penalty for those without qualified health insurance coverage.
As you can see, the proposed changes go much further than simply raising or cutting taxes. If some or all of these proposed changes make it into law, your current tax strategy may need some altering to accommodate them. Stay tuned for more developments.