President Trump’s new tax plan proposes some dramatic changes.
For one, the plan seeks to cut individual tax brackets from seven to three. And the corporate tax rate could plummet from 35 percent to 15 percent, giving the U.S. one of the lowest corporate tax rates in the world.
Trump’s proposal has received criticism from both sides of the political aisle. Although there’s still a long way to go before it becomes law, the final plan could have a major impact on your budget.
Read on to learn how Trump’s tax plan could affect you.
Itemized tax deductions are on the chopping block
When it comes to the individual taxpayer, one of the biggest changes has to do with itemized tax deductions. Currently, you can claim tax breaks for any of the following expenses:
- Home office (costs of equipment, insurance, utilities, repairs, and residence depreciation)
- Employee business (miscellaneous job expenses your employer doesn’t reimburse)
- State and local taxes (taxes you pay at the state and local level)
- Qualifying medical expenses (expensive medical bills or money in health savings accounts)
- Alimony and theft (money paid to former spouses and losses due to theft)
Under Trump’s tax plan, these itemized deductions would disappear. You could no longer claim a deduction for expenses on home office equipment or medical costs.
Tax credits and tax breaks are probably safe
It’s unclear whether student loan tax breaks and credits would get slashed, but it’s also a possibility. Currently, you can claim up to $2,500 with the American Opportunity Tax Credit or Lifetime Learning Credit.
Since student loan tax credits aren’t itemized deductions, they may be safe under the new tax plan. But if Trump aims to eliminate all individual tax credits, student loan borrowers would no longer get a break on their tax returns.
Charity and mortgage tax breaks are here to stay
While the plan targets most itemized tax deductions for elimination, Trump says he will not get rid of charity or mortgage tax breaks. So if you donate money to charity or pay interest on a mortgage, you’ll still be able to claim both expenses on your yearly tax returns for the foreseeable future.
But as mentioned above, state and local tax (SALT) deductions would no longer be available. People who pay high property taxes to their state and town could feel the burden of double taxation on their income.
The standard tax deduction could double
Not everyone makes itemized claims on their tax returns. Many claim the standard deduction every year. Currently, individuals can deduct $6,350 and married couples can claim $12,700 from their taxable income.
The new plan seeks to double this standard tax deduction. If this happens, taxpayers who don’t have complex finances could end up saving money on their taxes. Some would no longer have a need for itemized tax deductions anyway because the standard tax deduction would be the better option.
Top earners may benefit the most
Even with the standard deduction doubling, the average taxpayer may not save much money from the new tax plan. According to the Tax Policy Center, low and middle-class Americans would gain just 1.2 to 1.8 percent in after-tax income.
But the top one percent of earners would see a 14 percent increase in after-tax income. High-income households would get four main tax breaks:
- The tax rate for high earners would drop from 39.6 percent to 35 percent.
- The 28 percent alternative minimum tax for high-income households would disappear.
- The 40 percent estate tax, which applies to anyone who inherits $5.5 million or more, would be scrapped.
- There would no longer be a 3.8 percent tax on net investment income for couples making more than $250,000 a year.
In other words, Trump’s tax plan would give major tax breaks to people earning hundreds of thousands of dollars a year or more.
Congress will debate what happens next with Trump’s new tax plan
The new tax proposal has already set off a firestorm of debate among economists. The Committee for a Responsible Federal Budget estimated the plan would cost $3 to $7 trillion in lost revenue over the next 10 years.
However, Treasury Secretary Steven Mnuchin said the plan would pay for itself during a White House press conference. He suggested it would spur economic growth and create jobs.
At this point, the plan is an outline of President Trump’s goals more than final legislation. Lawmakers still have a long way to go to flesh out the details of Trump’s tax plan.