Trump's Tax Plan Made Easy
President Donald Trump announced his much-anticipated tax plan today, saying it would simplify the tax code and cut taxes on workers and corporations. Here’s what that actually means:
Tax brackets
What Trump’s plan says: “The framework shrinks the current seven tax brackets into three – 12%, 25% and 35% – with the potential for an additional top rate for the highest-income taxpayers to ensure that the wealthy do not contribute a lower share of taxes paid than they do today.”
What that means: There are currently seven tax brackets, and this changes it to three. Trump did not reveal the cutoffs for the brackets, but some people in the current lowest bracket, which is 10 percent, could actually see a two-percent tax hike. And the highest earners, people who make more than $418,400 a year, will have their taxes cut from 39.6 percent to 35 percent. That could save a $500,000-a-year executive $23,000.
Standard deduction and child tax credit
What Trump’s plan says: “The framework roughly doubles the standard deduction so that typical middle-class families will keep more of their paycheck. It also significantly increases the Child Tax Credit.”
What that means: The current child tax credit is for families in the 15-percent tax bracket and is supposed to offset the expense of raising a family. Currently, families can receive as much as $1,000 per child. Trump’s plan would increase the child tax credit to an unspecified amount and also create a new, $500 tax credit for all dependents, which can be children or dependent adults.
Loopholes for the wealthy
What Trump’s plan says: “To provide simplicity and fairness, the framework eliminates many itemized deductions that are primarily used by the wealthy, but retains tax incentives for home mortgage interest and charitable contributions, as well as tax incentives for work, higher education, and retirement security.”
What that means: The new plan would get rid of a number of itemized deductions, like the alternative minimum tax, plus eliminate the estate tax, a tax on inherited wealth, and state and local tax deductions. This allows people to write off their property taxes and their state and local income taxes, which could hurt the middle class. It would keep, as the plan says, deductions for mortgage interest, which wildly benefits wealthy people, along with charitable giving, education, and retirement savings plans.
The death tax and AMT
What Trump’s plan says: “The framework repeals the unfair Death Tax and substantially simplifies the tax code by repealing the existing individual AMT.”
What that means: The death tax literally affects about 0.2 percent of all estates, and only if they’re worth more than $5.5 million. The Alternative Minimum Tax, or AMT, was made to make sure the top American earners were paying taxes at all—even if it wasn’t much. For instance, some people in the U.S. who make between $200,000 and $1 million don't have incomes from taxable 9-5 jobs. The AMT ensures that they pay at least some taxes, but under this plan, they might not have to. The AMT raised the U.S. government about $38 billion in 2017.
Small businesses
What Trump’s plan says: “The framework limits the maximum tax rate for small and family-owned businesses to 25% — significantly lower than the top rate that these businesses pay today.”
What that means: The top rate is, indeed, dropping from 39.6 percent to 25 percent. Small businesses will get to keep more of their money.
Big corporations
What Trump’s plan says: “So that America can compete on [a] level playing field, the framework reduces the corporate tax rate to 20% – below the 22.5% average of the industrialized world.”
What that means: This is great for corporations; they get to keep more of their money than ever before, from the current 35 percent to 20 percent. It’s supposed to make the U.S. more competitive against other countries, but it could also widen the economic inequality gap between the wealthy and very wealthy. Few corporations currently pay the 35 percent, thanks to loopholes.
Investments
What Trump’s plan says: “The framework allows, for at least five years, businesses to immediately write off (or “expense”) the cost of new investments, giving a much-needed lift to the economy.”
What that means: It’s intended to help businesses grow, and would allow them to not have to pay for business investments out of pocket. This ability would only last five years, and there will be limitations on deductions, but the number is still unknown.
Increasing competition and offshoring jobs
What Trump’s plan says: “The framework ends the perverse incentive to offshore jobs and keep foreign profits overseas. It levels the playing field for American companies and workers...“The framework brings home profits by imposing a one-time, low tax rate on wealth that has already accumulated overseas so there is no tax incentive to keeping the money offshore.”
What that means: We don't know because actual numbers were not provided. Trump’s tax plan will ask tax committees to get rid of the tax credits businesses use today, but to keep credit for research and development and low-income housing. There will be a one-time tax on companies who don’t bring their profits back to the U.S. The amount of that tax is unknown.
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