It isn’t very often that a President is able to fully realize his or her tax plan, which is usually a good thing. The Bush tax cuts passed 15 years ago still have a profound affect on most American workers. If Donald Trump is able to have legislation passed that enacts his tax policies, it is entirely possible that they will be in place for many decades to come. This is why it is vitally important to understand how the Donald Trump tax plan will affect you.
The Donald Trump tax plan will reduce the total number of tax brackets and leave us with 3 brackets. The numbers below are for married filers. Single filers will have brackets with half the income amounts. The filing status of Head of Household will be eliminated.
Income Tax Bracket
$75,000 – $225,000 25%
$225,000 + 33%
The first thing I notice in these new brackets is the elimination of the 10% tax bracket. Currently a married couple would be in the 10% bracket up until an income of $18,550. Shifting this to a 12% bracket is a fairly substantial increase and will increase taxes for someone with a taxable income of $18,550 by $371.
Now, since the 15% bracket has been shrunk to 12%, there is a greater tax savings for people once their taxable income crosses the 18,550 threshold. For someone earning $75,000 the portion in the 15% bracket will have taxes reduced by $1,693.50. Factor in the $371 extra paid from the 10% bracket being eliminated and a family with a taxable income of $75,000 will have taxes reduced by $1,322.50. The “break even” point where the $371 loss from the elimination of the 10% bracket and the reduction of the 15% bracket is a taxable income o $30,916. People with an income below this end up paying more in taxes and people with an income above this end up ahead.
Taxable income between $151,900 and $225,000 will be reduced from 28% to 25%
Taxable income between $225,000 and $231,450 will be increased from 28% to 33%
Taxable income between $231,450 and $413,350 will stay the same
Taxable income of $413,350 and above will be reduced to 33%. Currently taxable income between $413,351 and $466,950 is taxed at 35%, and income over $466,950 is taxed at 39.6%.
All in all there are no earth shattering changes here. Middle income earners who have a taxable income of between $31,000 and $225,000 end up ahead, but not by a large margin. The largest gains go to those with an income above $413,350.
Standard Deductions and Exemptions:
Currently the standard deduction for single filers is $6,300 and for a married couple is $12,600. In addition to the standard deduction there is a $4,050 personal exemption per person, including dependents.
Donald Trump plans to eliminate the personal exemption and increase the standard deduction. This favors single filers and married filers with no children, as everyone will get the same reduction in taxable income. The new standard deductions will be $15,000 for single filers and $30,000 for married filers. As a married filer with 4 children to claim, our standard deduction and exemption total will go down by $6,900. A married couple with no children will see their standard deduction / exemption combo benefit increase by $9,300. For a couple in the 12% tax bracket this is a tax reduction of $1,116, in the 25% bracket $2,325, and for the 33% bracket $3,069.
Since I will be in the 12% marginal tax bracket, this results in a tax increase for me of $828. For families with 2 or fewer children this change will be a net reduction in income tax paid.
Although this policy works against me now, in retirement it is a heck of a deal. If the first $30,000 of income is 100% tax free, as opposed to the current $20,700. Being able to withdrawal an extra $9,300 from a traditional IRA or 401K with no taxes owed is a major change. This represents another $240,000 of assets (assuming a 4% withdrawal rate) that can be used tax free in a 401K. One more reason to highly consider stopping contributions to a Roth.
Child Tax Credits/ Deductions
Okay, so having more kids increased our taxes from the standard deduction position, but Donald Trump has an extremely large tax cut for children in this area. The Childcare tax deduction will reduce taxable income for each child under the age of 13, up to 4 children total. The big news here is that stay at home parents will receive the same benefit as parents who pay for child care. The benefit is capped at the average annual cost of childcare. Married filers earning over $500,00 and single filers earning over $250,000 will not be eligible for the deduction.
In Michigan, which has the 12th highest cost of all 50 states, the average annual cost for childcare is $10,114. Remember how I was a big loser on the elimination of the personal exemptions above? Well now, each child under 13 is worth a $10,000 deduction, instead of the $4,050 they were before, AND I would still get the $30,000 standard deduction. Since I have 3 kids under 13, this would reduce our taxable income by $30,000. Now our income sheet looks like this:
- Income (rough estimate) $80,000
- HSA/401K/IRA Contributions: -$20,000
- Adjusted Gross Income $60,000
- Standard Deduction – $30,000
- Child Tax Deduction – $30,000
- Taxable Income: $0.
Bam! no tax owed. Also, I would need to shift more of my savings into taxable brokerage accounts, as I would not gain anything from contributing more than $20,000 to tax advantaged accounts.
For low income families this tax deduction would do very little. The solution that Trump has for that is to expand he Earned Income Tax Credit by up to $1,200 to offset child care costs.
The U.S. has an extremely high business tax rate of 35%. The Trump plan will slash this to 15%.
The Trump plan will allow a one time transfer of profits earned in other countries at a tax rate of 10%. That $200 Billion that Apple is holding overseas will come back to the United States. Other companies hold a combined $1.5 trillion in cash in other countries. Not only will all this money come back to the U.S. The government will gain $170 Billion in taxes by bringing this money back.
So yeah, this all appears pretty good, very few Americans will pay more taxes and Americans with kids will pay a lot less taxes, and businesses will pay FAR fewer taxes, making the United States the tax haven of the world. With all of these tax cuts, how will we support a $3.6 Trillion national budget?
We have been deficit spending forever and have $20 Trillion in debt. Donald Trump believes that the explosive growth the U.S. will see thanks to his plan to increase U.S. investment and eliminate the trade deficit, total tax revenues will increase greatly, despite much lower rates. For only 4 years in my lifetime, thanks to the dotcom boom, has the federal budget been balanced, so if Donald Trump can pull it off it will be an historic feat. It is entirely possible though that while these tax cuts in the short term will have a positive effect on us, they will be detrimental to our children and grandchildren who will be saddled with a $20 Trillion + national debt.
How will Donald Trump’s tax plan affect you? Are you ready for these major tax changes?