Trump’s Tax Reform Plan Could Boost Your Paycheck, but What are the Costs?
President Donald Trump has been promising sweeping tax reform since his campaign.
His priorities were clear: He wanted to simplify the tax code and lower taxes for individuals and businesses. Last week, we got the first glimpse of the specifics his administration is proposing.
During a press briefing, Gary Cohn, Trump’s chief economic adviser and director of the National Economic Council, touted the plan as a “once-in-a-generation opportunity to do something big” and “the most significant tax reform legislation” in three decades.
But before we get caught up in the clash of opinions, let’s talk facts and what they mean for you.
Trump Wants to Change How You File and Pay Your Individual Taxes
Many of the details are still sparse, but one thing is for sure: The Trump administration values simplicity.
“In 1935, we had a one-page tax form consisting of 34 lines with two pages of instructions,” Cohn said last week. “Today the basic 1040 form has 79 lines and 211 pages of instructions… And nearly 90 percent of taxpayers need some help in filing their taxes.”
Trump wants to change that.
To streamline the process, Trump wants to consolidate the seven current tax brackets, which range from 10% for poor Americans to 39.6% for the richest, into three: 10%, 25% and 35%.
Although the administration has not released the income requirements for each of the new brackets, we can already see that the richest Americans will pay less than before. It’s too soon to say how the change will impact middle- and lower-income Americans.
Trump also wants to nearly double the standard deduction, which is the dollar amount those who don’t itemize their deductions can subtract from their taxable income.
For single people, the 2016 standard deduction was $6,300. For married couples filing jointly, the deduction was $12,600.
“So, in essence, we are creating a zero tax rate… for the first $24,000 that a couple earns,” Cohn said.
That change mostly makes up for Republican plans to eliminate all individual tax deductions except those related to mortgage, retirement savings and charitable giving.
The plan also promises to provide child care relief for parents, but Cohn did not elaborate.
Massive Tax Cut for Businesses
One of the most aggressive changes the Trump tax plan proposes is to lower the percentage businesses pay in taxes. Currently, businesses pay a 35% corporate income tax, but Trump wants to lower that to 15%.
That lower rate would apply to all businesses, from massive corporations to mom-and-pop shops (and possibly us penny-hoarding freelancers, though the details are still being worked out).
According to Secretary of Treasury Steve Mnuchin, the tax cut is necessary to make U.S. businesses more competitive in international markets, create more jobs at home and boost the economy. In fact, the expected boost in the economy is how Republicans say the tax bill will pay for itself and reduce the national deficit.
However, this massive tax cut for businesses also creates a loophole for individuals, especially the super-rich, to abuse.
Remember the new tax brackets Trump wants to create? These are important here. New York Times writer Neil Irwin illustrated how easily we could all game the system and pay lower taxes.
Let’s assume Irwin, whose New York Times income puts him in the 28% tax bracket under the current law, would fall into the 25% bracket under Trump. Rather than pay that rate, he could easily form a limited liability company (LLC) that contracts with The New York Times to perform the same work he does now for the same pay.
“Under current law, I would pay the same taxes on that business income that I do on personal income,” Irwin wrote. “In important ways I would be worse off, as I would need to pay more of my own payroll taxes, wouldn’t have unemployment insurance, and would need to get health insurance through some channel other than my employer.
“But under the Trump tax plan, my tax rate would fall to 15 percent from 28 percent, saving thousands of dollars a year — enough to justify those annoyances.”
And uber-rich Americans could do the same thing and, instead of paying a 35% rate, get away with paying 15%.
Of course, for poorer Americans who would fall into Trump’s 10% tax bracket, starting an LLC would lead to a higher rate.
Mnuchin acknowledged the obvious loophole but didn’t provide specifics on how the tax plan would close it.
“We will make sure that there are rules in place so that wealthy people can’t create pass-throughs and use that as a mechanism to avoid paying the tax rate that they should be on the personal side,” Mnuchin said.
Killing the ‘Death Tax’
The final piece of this plan is something that’ll probably mean nothing to most of us: Trump wants to eliminate what is known as the “death tax.”
The way Cohn describes it, it seems obvious to repeal it:
“The threat of being hit by the death tax leaves small business owners and farmers in this country to waste countless hours and resources on complicated estate planning to make sure their children aren’t hit with a huge tax when they die,” he said. “No one wants to see their children have to sell the family business to pay an unfair tax.”
But in reality, most small-business owners and farmers will never have to think about it.
The death tax, the fee the government assesses on a person’s estate when transferring an inheritance after death, only applies to estates worth more than $5.5 million per person or $11 million for a couple. According to CBS News, the death tax is around 17% on average.
It’s not clear exactly when Congress will vote on the new tax plan, but Mnuchin said the goal is to present it before the end of this year.
Although Cohn said the plan is “good for America,” the Trump administration is gearing up for a fight to get it passed.
“This isn’t going to be easy,” he said. “Doing big things never is. We will be attacked from the left and we will be attacked from the right. But one thing is certain: I would never, ever bet against this president. He will get this done for the American people.”
Your Turn: Do you see the new Trump tax plan as beneficial or harmful for your family?
Desiree Stennett (@desi_stennett) is a staff writer at The Penny Hoarder.
The Penny Hoarder Promise: We provide accurate, reliable information. Here’s why you can trust us and how we make money.