Imagine proposing to your significant other, only to be swiftly and publicly shot down. How confident would you be to propose again?
You have to give Trump credit; after proposing to repeal Obamacare and being rejected by the Senate, he got right back up, dusted himself off, and proposed one of the most widespread tax reforms in years.
But what does it all mean? More specifically, what does it mean for millennials? Let me start by saying the framework does not contain a lot of detail, so we will have to wait until the final bill gets passed (if at all) to see exactly what effects it would have. With that said, let’s take a look.
Lower Tax Rates
Trump wants to knock down the number of tax brackets from seven to three – 12%, 25%, and 35%. There is no specification on which income ranges will be assigned to each bracket, but one thing we do know for sure is that those who are currently being taxed at the highest rate of 39.6% will get a pretty nice tax cut.
As for the lower brackets, certain taxpayers could receive a bump up to a slightly higher rate under the proposed structure. For example, those taxed at 10% currently could be bumped to the 12% bracket and those taxed at 33% could move to 35%. These increases could (and hopefully would) be offset by other proposed changes, such as the higher standard deduction and increased child/dependent deductions and credits (more on this later).
Higher Standard Deductions and Elimination of Personal Exemptions
Our current tax code allows a standard deduction and personal exemptions. You receive a personal exemption for yourself, your spouse (if you’re married), and one for each of your dependents (if any). You can either take the standard deduction or itemize your deductions if the total is higher than your standard deduction (more on this later).
The proposed framework includes an increase to the standard deduction (nearly double), but calls for an elimination of personal exemptions.
The new standard deductions would be as follows:
|Filing Status||Standard Deduction|
A lot of people, both single and married, will benefit from the higher standard deduction and lower tax rates; some, on the other hand, will actually be worse off:
- Current “head of household” filers – Head of household filers enjoy a higher standard deduction than single filers or those who are married filing separately (currently $9,350 vs. $6,350). Although the proposal doesn’t specifically mention it, it is believed that the head of household filing status will be eliminated.
- Those with two or more children/dependents – Since you currently get a personal exemption for each of your dependents, the proposed higher standard deduction would not make up for the loss of two or more personal exemptions.
Less Itemized Deductions
Nearly 70% of taxpayers do not itemize, so this section may not apply to you. If you itemize your deductions, however, you may want to sit down for this next part…
Trump is proposing to eliminate nearly all itemized deductions. The plan is to keep the deductions for charitable contributions and home mortgage interest, but everything else appears to get the ax.
One of the major deductions being eliminated is the deduction for state and local taxes. This is made up of your state (and city, if applicable) withholdings and estimated tax payments, real estate taxes paid on your home, and personal property taxes. If you live in a high-tax state like New York or California, or if you own a home, this could cost you a nice chunk of change.
Other itemized deductions that would no longer exist include:
- Medical insurance premiums and other medical expenses
- Investment interest and expenses
- Unreimbursed employee expenses
- Home office deduction
Increased Credits and Deductions for Children
If you have a child that’s under 17, you may be familiar with the Child Tax Credit. It is a credit that reduces your tax liability dollar-for-dollar, up to $1,000 per child. The amount of the credit you are entitled to depends on your income; if your adjusted gross income (AGI) is below $75,000 (single), $110,000 (married filing jointly), or $55,000 (married filing separately), you are entitled to the entire credit. With an AGI above those numbers, the credit begins to phase out (it gets reduced by $50 for every $1,000 above the previously mentioned thresholds).
It is a refundable credit, which means that if your tax liability is less than $1,000, it will wipe that out and you will receive the excess as a refund.
The proposed framework says it will “significantly [increase] the Child Tax Credit” and “increase the income levels at which the Child Tax Credit begins to phase out”. We don’t yet have any numbers to put to these statements, but the plan is to create enough of a benefit to lower- and middle-class families to exceed the shortfalls created by the possible increase in tax rate if you get bumped to a higher bracket, the elimination of personal exemptions, and/or the elimination of most itemized deductions.
Reduced Tax Rates For Small Businesses and Corporations
If you own a business, big or small, this part will make you smile. If you don’t own a business, this picture of a dog in a Superman costume will make you smile:
See? Okay, now back to it…
Small businesses organized as sole proprietorships, partnerships, LLCs, or S corporations are considered “pass-through” entities, meaning they are not taxed at the partnership/corporate level. Instead, the income and expenses get passed through to you and are reported on your personal income tax return; any tax due is paid by you at the personal level, meaning the profits from your business are taxed at your personal ordinary tax rates.
Trump is proposing to cut the top tax rate on small businesses to 25%. This means big-time savings for those who currently own small businesses and are in any tax bracket over 25%.
The maximum tax rate for corporations is currently 35%. The framework is slashing it to 20%. This is one of the staples of the proposal and means YUUUGE savings for big businesses.
Elimination of the Alternative Minimum Tax (AMT) and the “Death Tax”
The AMT has become one of the most complicated aspects of the Tax Code and, in doing so, has somewhat deviated from its original purpose. This additional tax mainly affects higher-income taxpayers who itemize their deductions.
The estate tax, or more commonly known as the “death tax”, is exactly what it sounds like – a tax on your assets when you die. Only the wealthiest individuals are impacted by this seeing as the total assets at the date of death must exceed $5.49 million (in 2017) in order to possibly generate a tax.
Republicans have been battling for the repeal of both the AMT and the estate tax for quite some time, so it should come as no surprise that Trump’s proposal calls for exactly that.
How Could All This Affect You, Personally?
The changes in the tax proposal are so widespread and broad that they can mean something different for every single person or family. If you want to find out exactly how you could be affected, scroll down a bit and make use of that contact info! We’d be happy to help.
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Nick Aiola is a CPA and the owner of Aiola CPA, PLLC. Nick and his team provide the highest quality of tax and advisory services to real estate investors and individuals and business owners in the real estate industry.
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