Try saying that ten times quickly. Not very easy, is it? Well, neither is navigating through all the details, new ideas and proposals Trump recently released. But guess what? I did it for you! You’re welcome.
Important disclosure: I am by no means endorsing (or rejecting) any part of Trump’s proposed tax overhaul. I am also not endorsing (or rejecting) Trump or any of his other policies. I do not intend for this blog post to incite any sort of ideological debate. Rather, my intent is to simply inform you of what is being discussed by our political leaders as it pertains to our current federal system of tax. The proposal, in its entirety can, and probably will, change in the very near future as congress debates it.
Alright, I needed to get that off my chest.
There are a lot of proposed changes that Trump has unveiled. Some are very specific. Some are very vague. He has put forward changes that will affect both individual tax filers, as well as businesses too. For the purposes of this post, I’d like to focus on the sweeping purported changes to the individual taxpayer (since nearly all of my readers fit into that category).
We’ll take a look at the major highlights and discuss each one briefly as I don’t want to bore you into an early evening retirement. Here are some of the major proposed changes to the individual taxpayer:
- Reduce the current amount of tax bracket from seven to three (12%, 25% and 35%).
- Double the standard deduction from $6,350 (single filer) and $12,700 (joint filer) to $12,700 (single filer) and $25,400 (joint filer).
- Eliminate the personal exemption.
- Increase the child tax credit. (Trump has not stated this as a sure thing, nor stated an amount it would increase by. It’s all hearsay at the moment).
- Eliminate the deduction for state and local taxes.
I’d like to keep this high level as opposed to getting into the weeds. Not because I think you’re an idiot, rather because after all the Washington drama (which you and I both know is sure to come) all these proposed changes are likely to be changed, altered, or even all together scrapped. We will have to wait and see.
Reducing the current number of tax brackets. What does that mean? Well, our current federal tax system is progressive. What that means is that our first “layer” of income is subject to a 10% federal income tax. The second “layer” is subject to a 15% federal income tax. So on, and so forth, until we get to the currently highest seventh “layer” which is 39.6%. Only the government could create a tax bracket that ends in a .6%. Reducing the “layers” down to only three would certainly simplify things, but it may or may not reduce your tax bill. A number of other factors would come into play.
Such as, whether or not you utilize the standard deduction. The standard deduction is a number that reduces your taxable income. Either you use the standard deduction or you itemize your deductions. Generally speaking, if you own rental property(s) or have ownership in a business entity it might be beneficial to itemize your deductions. Or if you’re in sales, but that’s a conversation for another day. Currently the standard deduction for single filers is $6,350 and $12,700 for joint filers. Trump wants to double those to $12,700 and $25,400 respectively. Fairly cut and dry here folks. This would result in a higher deduction and a lower amount of taxable income.
Then we have the personal exemptions. Every tax filer currently gets an exemption of $4,050 (in 2017) for each person in their household. It’s very similar to a deduction in that it reduces your taxable income which should, in turn, should reduce your total amount of federal tax. So if you’re married, file jointly and have 2 kids your total personal exemption would be $16,200. The Trump proposal would eliminate them. According to the administration, the combination of a higher standard deduction, fewer tax brackets and a possible increase of the child tax credit, will result in the same amount of federal income tax, or even less. That will remain to be seen.
Next we have the child tax credit. It is currently set at $1,000 for each dependent child, if you qualify. This is a tax credit, not a deduction. A tax credit is much more valuable at the end of the day. While a deduction will reduce your taxable income, a tax credit is a reduction in your bottom line tax bill. It’s a dollar for dollar reduction in your total tax. Thus far, all we know is that there is talk of increasing this tax credit. I’ve got four kids so, believe me, I’m in total agreement if Washington wants to up this tax credit!
The final proposal that I’ll cover is the proposed elimination of the state and local tax deduction. Currently, taxpayers are allowed to deduct any state and/or local income tax on their federal tax return. In states with a significant income tax rate, like Illinois for example, this deduction is a very nice deduction to utilize. In my opinion, this will be a difficult deduction to eliminate because of all the politics involved. But, as I stated prior, we will see how it all shakes out.
There you have it folks. The major highlights of the 2017 Trump tax proposal. By the time any of this actually comes to pass, I fully anticipate it to be changed, massaged, altered, and argued over for months. So, this blog post may be totally useless come 2018. With the way of the world these days I have absolutely no idea how this whole tax proposal situation will end up. It wouldn’t be much fun if we knew the future now would it?