President-Elect Donald Trump proposed comprehensive tax reform plan during his campaign. With a Republican-controlled legislature, there is a good chance that most or all of his proposals will take effect in 2017.
Both President-Elect Trump and the Republican Congress have proposed reducing the number of tax brackets from seven to three. It removes the two lowest tax brackets (10% and 15%) and the two highest tax brackets (35% and 39.6%). The proposed tax brackets would be:
- Less than $37,500: 12%
- Between $37,500 and $112,500: 25%
- Over $112,500: 33%
Married filing jointly:
- Less than $75,000: 12%
- Between $75,000 and $225,000: 25%
- More than $225,000: 33%
However, this will still result in tax increases for some. Under the current tax system, a single person making over $112,500 would be taxed at the 28% bracket and would stay there until their income reaches $190,150. Under the proposed system, those making between $112,500 and $190,150 would pay an additional 5% in taxes.
Also, Trump and the Republicans plan to eliminate the Alternative Minimum Tax (AMT). The AMT is an alternative tax system where many itemized deductions are added back to taxable income and the income is taxed at a different tax rate. The taxpayer must pay the higher of either the regular income tax or the AMT.
They also propose to increase the standard deduction for joint filers to $30,000 and $15,000 for single filers. The personal exemptions and the head-of-household filing status will be eliminated. But they will also cap itemized deductions at $200,000 for joint filers and $100,000 for single filers. The elimination of head of household status will force single parents to pay additional taxes.
Also, a cap on itemized deductions can also increase taxes for those who pay high mortgage interest, pay high state sales and income taxes, and those spend who most of their income on health care. But the difference in the tax bill may be negligible since most people who have high income and claim large itemized deductions are likely to be subject to the AMT which adds back most itemized deductions back to taxable income anyway.
Finally, Trump proposes to cut business taxes to 15%.
There is no actual federal “business tax” although there are several types of business taxes. Self-employment taxes are fixed at 15.3% until earnings of $118,500 as of 2015. For individuals and S-corporations, they are taxed at the personal income tax rates. There is no indication that either of these taxes will be changed to a flat 15%.
C-corporations, like individuals, have multiple tax brackets, and some have speculated that this would be the most likely target for a flat 15% tax rate. But I think this is unlikely. Instead, the current top corporate tax rate of 35% will be lowered in order to encourage multinational corporations to repatriate overseas earnings back to the U.S.
Make sure to keep an eye on changes to both the individual and business tax laws, because both could significantly affect your tax consequences next year.