There’s an old saying that “all politics are local,” which means citizens ultimately view national and even international issues through the lens of how the outcome will impact them, their family and community.
I think that’s true, which is why “all politics are also financial.” Take the recent Presidential election, for example. Yes, people on both sides cast their votes based, in part, on a variety of social and foreign policy issues. But Donald Trump is headed to the White House primarily because voters in key states believe their wallets will benefit from Trump’s economic policies, including his promise to lower income taxes for most American wage-earners. And even those who didn’t support Trump are now keenly interested in how their personal finances will be impacted by the new Administration.
The bottom line: The vast majority of Americans should see at least a modest increase in their take-home pay if Trump’s plan is enacted in its current form. Here’s a look at what it might mean for you.
Trump has promised to lower income taxes and reduce the number of tax brackets from seven to three – 12%, 25% and 33%. Individuals making up to $37,500 and married filers earning up to $75,000 would pay 12%. Single filers making $37,500 to $112,000 and married filers earning $75,000 to $225,000 would pay 25%. Earnings above those levels would be taxed at 33%.
He’s also proposed a larger standard deduction — $30,000 for married filers, up from the current $12,600, and $15,000 for single filers, more than double the current $6,300. However, Trump also wants to eliminate the current $4,050 personal deduction that filers may take for themselves, their spouse and each dependent.
According to the Tax Policy Center, if Trump’s current plan becomes law, the average family in America would see their effective or overall tax rate reduced by about 2%. But that’s an average. Wage earners at various levels would fare very differently.
The biggest winners are the wealthiest taxpayers. Those infamous “one-percenters” would see their tax rate drop 6.5% from 38.8% to 32.3%. Many of these wealthy individuals are business owners who will also benefit from Trump’s plan to lower business tax rates 24.6%. Middle-income earners would get a 1.7% cut from 19.2% to 17.5%. The poorest taxpayers would see a reduction of 0.6% as their rate drops from 2.3% to 1.7%.
But beware: If you don’t itemize you could actually lose deductions under the Trump plan. Take, for example, a family of five that currently claims the standard deduction: Under current law, they receive a $12,600 standard deduction plus $20,250 of personal exemptions, for a total tax benefit of $32,850. If the Trump plan is enacted, the family will get only the $30,000 standard deduction, and no personal exemptions.
There are some kinks in the Trump plan that might need some attention. For example, middle-income single moms would take a hit under Trump’s plan. A mother raising two kids on $75,000 would see her taxes rise 3.3% under the President-elect’s proposal. But a single guy with no kids also making $75,000 would enjoy a 2.4% tax cut.
The Tax Policy Center estimates that Trump’s tax plan would reduce the federal government’s revenues by $6.2 trillion over the next decade. An estimated 47% of that would go to the wealthiest Americans. Those earning $48,800 or less will see an average $400 tax cut while taxpayers making in excess of $700,000 would get a $215,000 reduction. There’s nothing inherently wrong with that, and putting more money in the pockets of business operators could lead to more investment and/or leisure spending, which could create jobs and growth. But the disparity could raise some eyebrows on Capitol Hill.
It’s important to remember Trump’s plan is just a proposal. True, the incoming President does enjoy majorities in both houses of Congress. But Republicans seldom act in a lockstep majority. Some GOP lawmakers may have trouble with that $6.2 trillion price tag. The Trump team and it’s supporters will argue that economic growth spurred by the tax cuts will reduce that shortfall, but there is a great deal of disagreement as to how much expansion would be spurred by the plan. Sniping from Democrats about alleged unfairness of the cuts might also lead to changes.
Still and all, it seems likely that many Americans will soon have more money in their pockets on payday. As a financial planner taxpayer and business owner, I’m all in favor of that.
Use this tool on Clark.com by the Tax Foundation to calculate how much money you may expect to lose or gain under the tax proposal outlined by Donald Trump. And, check out the full charts below to see how taxes would be affected according to your income level, marriage status and number of dependents.
*Charts represents Income Tax in dollar amounts.
*Charts represent Income Tax in percentages.
Click here for the Tax Foundation’s full analysis of Donald Trump’s tax plan.