President-elect Donald J. Trump will soon assume the presidency and will then have the opportunity to implement his tax plan. According to Trump’s vision, as stated on his campaign fact sheet, these are the areas that may affect your taxes:
- Reduce taxes across-the-board, especially for working and middle-income Americans who will receive a massive tax reduction.
- Reduce the cost of childcare by allowing families to deduct the average cost of childcare from their taxes, including stay-at-home parents.
Campaign promises are often left unfulfilled, but according to an analysis of Trump’s tax plan by the nonprofit Tax Foundation, here are the possible outcomes of how a Trump Presidency could affect your taxes.
Lower Ordinary Income Tax Rates
Trump has proposed simplifying the tax code starting by cutting the seven tax brackets on ordinary income, which range from 10 percent to 39.6 percent, down to three: 12%, 25% and 33%. As a result, the top rate would be 33%, equal to a reduction of 6.6%.
Replace Exemptions & Standard Deduction
Under Trump’s proposal, he would replace the current personal exemption ($4,050 per individual and dependents), and the current standard deduction ($6,300 for single filers and $12,600 for married filers) with a standard deduction of $30,000 for married filers and $15,000 for single filers.
A single filer with no dependents earning $50,000 would net a tax savings of approximately $1,500. Married filers with two dependents earning $100,000 would net a tax savings of approximately $600, not factoring in the expanded childcare deductions. For most people, this change would result in tax savings.
Eliminate the Estate Tax
Trump has proposed eliminating the estate tax. Under current law, estates valued over $5.45 million are taxed at 40% of the excess value. His tax plan would only tax the asset’s appreciation for estates valued over $10 million. They won’t be taxed immediately upon death, but when the beneficiary sells the assets. Although it is not practical to time one’s death, if you have a large estate, the next four years may be an ideal time.
Expanded Childcare Deductions
Trump’s tax plan would allow a deduction for childcare costs up to an amount equal to the average cost of childcare in your state. In addition, a tax credit up to $1,200 for childcare expenses would be available for lower income families. This additional deduction might offset the lost personal exemptions for big families with children.
Hit to Big Families
Trump’s proposal would eliminate personal exemptions but increase the standard deduction. Currently, taxpayers may claim a $4,050 personal exemption for themselves, their spouse, and dependents.
A married couple with four children who claim the standard deduction will lose deductions under Trump’s tax plan. Currently, they would be entitled to a $12,600 standard deduction and $24,300 of personal exemptions, creating a total tax deduction of $36,900. Under Trump’s tax plan, it would be replaced with a $30,000 standard deduction, losing $6,900 worth of deductions.
Hit to Single Parents
Another potential negative is the proposed elimination of the head-of-household filing status used by over 20 million taxpayers. Single parents may be hit especially hard, since it would increase their taxes at most income levels.
The next four years will be interesting, since political gridlock may not be an issue. Republicans will control the presidency and Congress. Trump’s tax plan is far from certain, but there will be little to stop Trump if he wishes to proceed with his tax plan.
Mr. Noel B. Lorenzana is an Illinois Registered Certified Public Accountant with over 20 years of experience, dedicated to providing outstanding tax and accounting services to individuals and small businesses in the Chicagoland area. Contact me to find out how I can help you reduce your taxes.
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Disclaimer: Any accounting, business or tax advice contained in this article, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties. If desired, I would be pleased to perform the requisite research and provide you with a detailed written analysis. Such an engagement may be the subject of a separate engagement letter that would define the scope and limits of the desired consultation services.