What Trump’s Tax Reform Plan Could Mean for Your Wallet

tax reform

Now that Republicans have admitted defeat on “repeal and replace,” attention is turning toward tax reform, which has been one of President Donald Trump’s priorities. In a speech today in Indiana, he laid out a framework for his tax plan — one he hopes Congress will adopt.

But what does the Trump tax plan mean for you? While the framework calls for a lower corporate tax rate, it also focuses on individual tax reform.

“[T]here is no reason Democrats and Republicans in Congress should not come together to deliver this giant win for the American people and begin the Middle Class Miracle once again,” he said.

Here are the president’s priorities for individual taxes.

New marginal tax rates

The Trump tax plan reduces the number of tax brackets from seven — ranging from 10 percent to 39.6 percent — to three. The new brackets would be 12 percent, 25 percent, and 35 percent. The framework also suggests that Congress could add a fourth bracket on top if they deem it necessary.

The new tax brackets would simplify matters, especially if most itemized deductions and credits are eliminated from the situation.

House Speaker Paul Ryan has been a supporter of a simplified system, insisting that a tax return should be able to fit on a postcard. The president and those who support this framework claim that a simplified tax code would mean lower taxes for everyone.

However, said Kay Bell, a tax journalist who has been reporting on tax policy issues for more than 20 years, the framework is vague and the simplified tax brackets might not offer promised relief to the middle class.

“This framework is even much less formed than some of the plans the Trump campaign put out. There isn’t a lot of meat here, and Congress will need to fill in the blanks,” said Bell.

“The real devil is in the details,” she added. “It sounds nice to have this type of simplified tax reform, but when you toss in everything else, those simple tax brackets might not actually benefit lower- and middle-income Americans.”

Higher standard deduction

One of the highlights of the plan is an increase in the standard deduction. Under the Trump tax plan, single filers would see a standard deduction of $12,000. Married couples would see a deduction of $24,000. This almost doubles the current standard deduction.

“Typical families in the existing 10 percent bracket are expected to be better off under the framework due to the larger standard deduction, larger child tax credit and additional tax relief that will be included during the committee process,” according to the framework document.

Bell isn’t so sure, at first blush, if this really will be better for middle-class families.

“It looks like they are getting rid of personal exemptions, which reduce your income before you get to the standard deduction,” said Bell. “A family with a couple kids could see the good of the doubled standard deduction erased.”

For example, right now, you receive a $4,050 personal exemption for you, your spouse, and each child. For a two-parent family with two children, four exemptions add up to $16,200. With the current standard deduction for married couples sitting at $12,700, that means a total of $28,900 in current income reduction.

In this situation, that family could be worse off by $4,900 with tax reform.

Of course, the Trump tax reform plan promises a child tax credit higher than the current $1,000, and “additional tax relief.” The framework leaves it up to tax-writing committees in Congress to come up with these amounts.

“We will have to rely on our representatives to make good on their promise that this framework really does mean lower taxes for the middle class,” said Bell.

Getting rid of most itemized deductions

Under the Trump tax plan, most itemized deductions that can save you money will disappear. However, the tax reform framework suggests keeping the mortgage interest tax deduction, and the deduction for charitable contributions.

These are popular deductions, but they mostly go to the wealthy. “A relatively small number of middle-class families benefit from these deductions,” Bell said. “For many of them, the mortgage interest they pay and their charitable donations aren’t large enough to beat the standard deduction.”

Other itemized deductions, such as the deduction for out-of-pocket medical costs and property taxes, might end up being cut, depending on what happens in Congressional committees.

Other individual aspects of tax reform

Rather than providing details, the Trump tax plan instead offers a general wish list and leaves most of the implementation up to Congress. The framework suggests doing away with the alternative minimum tax (AMT) and getting rid of hundreds of individual tax credits and deductions.

It’s unclear which individual tax credits and deductions would be axed. The president’s proposed framework also doesn’t suggest what happens to “above the line” tax deductions, such as for student loan interest and moving costs, which can be taken without itemizing.

The framework calls for retaining “tax benefits that encourage work, higher education, and retirement security.” But specific tax benefits aren’t identified. It would be up to lawmakers to decide which retirement and higher education benefits would still be accessible.

Repealing the estate tax

The Trump tax reform framework also calls for repealing the estate tax, which is often referred to as a death tax. “That is definitely going to benefit a small percentage of very wealthy people,” said Bell.

On top of that, the loss of the estate tax could also result in a drop for charitable bequests, according to a written statement from Jamie Hopkins, a professor of taxation at The American College of Financial Services.

The estate tax drives many people to plan ahead and confer some of their assets on charity. Hopkins wrote that when the estate tax was temporarily repealed in 2010, the results were devastating. Charitable bequests dropped by about 37 percent from the previous year.

Will the Trump tax reform plan really help middle- and lower-income families?

Bell is skeptical that this plan will actually benefit the families it claims to target. In his speech, President Trump claimed that this tax plan is “not good for me.”

However, Bell said that her reading of the framework tells a different story. “My cursory overlook of this plan is that it skews benefits to higher income earners,” she said.

“In fact, most of us might be pretty much the same as we are now,” Bell continued. “You might save a couple hundred bucks, which is nothing to sneeze at, but from the framework there’s no indication that massive middle class tax relief is going to happen, no matter what the politicians say.”

Hopkins, in his written remarks, took an even dimmer view of the results if Congress passes tax reform in line with President Trump’s framework.

“Expect to see a drop in charitable contributions in the next two years,” he wrote. “This will hit schools, hospitals, and research organizations heavily. This could mean increased costs from hospitals, education, and less research and development in the next few years.”

Tax reform doesn’t solve the biggest tax code issue

Furthermore, wrote Hopkins, the Trump tax plan doesn’t tackle what he sees as the biggest issue with the tax code: the fact that earned income is taxed more aggressively than unearned income.

Favorable tax rates remain for investments, which is how the wealthy make most of their money.

“This rewards those with wealth over those trying to work to obtain financial security,” wrote Hopkins. “Public policy wise, it would make sense to reward hard work with lower tax brackets and more aggressively tax passive income from money that just sits. People won’t stop investing if they have money.”

On top of that, Hopkins pointed out that there is no evidence that tax cuts provide enough economic growth to make up for the lost revenue. As a result, spending cuts are likely to be made along with the tax cuts — and that could mean spending cuts in programs that lower- and middle-income Americans rely on.

The president’s current budget proposal already takes aim at education spending and other programs that make up the social safety net.

How can you prepare for changes from the Trump tax plan?

In the end, Bell said your best bet is to look to the financial basics. “It sounds obvious, but [keep] working on your debt and building your savings. If you already have a tax plan, keep following it,” she said.

Bell said that’s really all you can do. “One of the biggest issues is that the Republicans have said they want to have this done for December, so it can apply to your 2017 taxes,” she said.

“We’re in quarter four,” she continued. “If you’ve planned your finances all year based on taking certain deductions or receiving certain credits, all you can do is hope all your planning isn’t overturned.”

So, get your finances in order and contact your Congressional representatives.

“Because so many of the details need to be hammered out, you have a chance to make your voice heard,” Bell said. “Let your representatives know of your concerns, and ask for specifics. We need to be active because this approach of ‘trust us, we’ll let you know when we’re ready to vote’ could come back to bite us regular folks later.”

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