President Trump has set forth an outline of some of his goals related to tax reform. It will remain interesting to see if any of these specific reform items gain traction during the first year of his presidency. President Trump has set forth an outline of some of his goals related to tax reform. It will remain interesting to see if any of these specific reform items gain traction during the first year of his presidency.
Individual Income Tax
One of President Trump’s plan items would reduce the number of individual income tax brackets. Currently, there are seven income tax brackets: 10%, 15%, 25% 28%, 33%, 35% and 39.6%. The plan would reduce the number of tax brackets to three: 10%, 25% and 35%.
Another plan item would double the standard deduction; the current standard deduction (2017) is as follows:
Single and Married Filing Separate – $6,350.00 (under new plan would be $12,700.00)
Head of Household – $9,350.00 (under new plan would be $18,700.00)
Married Filing Joint – $12,700.00 (under new plan would be $25,400.00)
Business Income Tax
A business income tax plan item would cap the corporate income tax rate. Currently, the highest corporate tax rate is 35%; the plan item would reduce this top tax rate to 15%.
The plan discusses a possible one-time tax on dollars held overseas. Further, the plan would eliminate tax benefits for certain “special interests” and implement a “territorial tax system”, where domestic profits are taxed at the full rate and profits from abroad are not subject to domestic income tax. This is in contrast to a “residence-based tax system”, where residents (or resident corporations) of a country are taxed on their worldwide (local and foreign) income, while nonresidents are taxed only on their local income.
Income Tax Simplification
The plan also discusses the elimination of some itemized deductions, such as medical expenses and state, local and real estate taxes. In the proposal, mortgage interest and charitable contributions are still deductible. Assuming the two plan items are considered, more taxpayers would take the double standard deduction when compared with the allowable itemized deductions of only mortgage interest and charitable contributions.
The proposal would also repeal the alternative minimum tax (AMT), the 3.8% net investment income tax (tax on investment income for high income taxpayers), the federal estate tax (which currently has an exemption of $5.49 million), and some other tax breaks that mainly benefit the wealthiest taxpayers.
Planning for the Future
Depending on whether President Trump’s various plans gain traction in Washington, many people will have question regarding how best to approach their federal income taxes in the future. If you have such questions, know that the Attorneys of Spesia & Taylor have the knowledge and expertise necessary to answer your questions and assist you with your taxes.