President Trump’s much-anticipated plan to overhaul the current tax code is now on the table. Coming in at just a page long, the President’s proposal was, well, a proposal. While not yet crafted into a bill ready to be put to vote, Trump’s plan does provide answers to many questions about the president’s notions of tax reform.
The plan seems to offer taxpayers a mixed bag. Overall, it’s the most sweeping proposal to lower individual income tax since the Reagan administration. While the changes simplify the code and tout improvements to the component tax pieces of income brackets and deduction amounts, there appears to be a looming threat to residents of states with high local taxes.
Consider this. Under the current code, taxpayers are allowed to deduct their state and local taxes from their federal bill. This is called the SALT deduction. Trump and the House GOP tax reformers propose to eliminate this deduction to partly compensate for overall lowered rates. For context, New Yorkers – who pay the highest state and local taxes in the country – on average have an itemized local tax deduction of $21,000.
So, we’re not talking pennies here. According to the Tax Policy Center, the SALT deduction is one of the largest federal tax expenditures, estimated at a revenue cost of $96 billion in 2017 and $1.3 trillion over the 10-year period from 2017 to 2026. Over half of all taxpayers earning $75,000 or more claim SALT deductions, as do over 90% of folks who make $200,000 or more.
The flip side here is that, for those with modest income levels, the loss of the SALT deduction may be offset by the proposed increased standard deduction. For the nation’s highest earners, the plan would cut the marginal tax rate to 35% from 39.6%.
When President Reagan tried to eliminate the SALT deduction, members of Congress from high-tax states (including some Republicans) defeated it. Only time will tell how this piece of Trump’s plan will fare.
So what else does the plan propose? Here’s a rundown of other changes to the tax code under Trump’s new deal:
Standard deductions – Under Trump’s proposal, the current standard deduction would nearly double. For the tax year 2017, the standard deduction is $6,350 for single filers and $12,700 for married couples filing jointly. The new plan provides that married couples will have a standard deduction of $24,000, meaning that the couple wouldn’t pay any income tax on the first $24,000 they earn.
Itemized deductions – While President Trump initially promised to cap itemized deductions at $100,000 for single filers and $200,000 for married couples filing jointly, the new plan doesn’t address caps. Language from the plan simply states that the administration aims to eliminate targeted tax breaks that predominantly benefit the wealthiest taxpayers. Under the new proposal, tax breaks for mortgage interest, retirement savings, and charitable giving remain in place.
Tax brackets – Currently, the tax code utilizes seven tax brackets. With Trump’s revised proposal, these would be slashed down to three, with rates of 10, 25, and 35%. However, the new proposal doesn’t yet outline the earned income limits for each bracket.
Capital gains taxes – Here again, the Trump administration is pushing to eliminate the 3.8% net income investment tax created by Obama’s Affordable Care Act. As it stands, this tax applies to investment income of taxpayers who have a modified adjusted gross income of over $200,000 for single filers and $250,000 for married couples filing jointly. By ending the net income investment tax, effective capital gains tax rates for high earners would drop from 23.8% to 20%.
Alternative minimum tax – True to his promise, President Trump remains focused on eliminating the alternative minimum tax (AMT). In effect for over 40 years, the AMT is an extra tax some people have to pay on top of their regular income tax. The theory behind the AMT when it was enacted was the prevention of folks with very high incomes from using special tax benefits to pay little to no tax. With a unique set of rates for deductions, AMT rules are less generous than non-AMT rules.
Over its history, however, the AMT has expanded its reach and now applies to taxpayers neither have very high incomes nor claim multiple special tax benefits. This expansion is due to the AMT’s failure to account for inflation. Today, the AMT requires over 5 million taxpayers to calculate their liability twice and pay the higher amount of the two figures.
Just how many of these changes will make their way through Congress and into law remains to be seen. Nevertheless, Trump has made a start.