How will Trump’s Tax Plan affect me if it is passed?
This is the question I’m starting to hear from clients all over the country. If passed, this will be the most complex and comprehensive tax act we have seen since 1986, the year I started in this business.
With a massive overhaul like this, the aim of which is primarily two-fold; Tax Reduction and Compliance Simplification, we will see a lot of parts of our current tax code deleted. In addition to the rules and regulations that will be done away with, we will see many sections of the code altered, amended or changed. And finally, we will no doubt see some additions, but not many.
After addressing the question of “how might the Trump Tax Plan affect me?” for a client in another state by email, I thought I would anonymously share the insights I provided to the client yesterday. The topic is on everyone’s mind right now and this may be helpful to you in understanding and anticipating the possible impact on your tax and financial situation.
Things That Will Be Deleted (Done Away With)
- The Deduction for State Income Taxes Paid – I advised the client he would lose the deduction for state income taxes he paid last year of $17,877 (COST him $5,899)
- The Alternative Minimum Tax – the client paid AMT last year of $3,122 which would go away (SAVE him $3,122)
- The Additional Medicare Tax – last year he and his wife paid $1,705 that would go away (SAVE them $1,705)
- Personal Exemptions – the deduction for Personal Exemptions they claimed last year of $5,508 would go away (COST $1,818)
Things That Will Be Changed (Altered)
- The Income Tax Brackets – Trump’s plan proposes three federal income tax brackets: 12%, 25%, and 35%. Right now we have 10%, 15%, 25%, 28%, 33%, 35% and 39.6%.
- Break Points – What they have not yet disclosed about the proposed plan, is at what taxable income levels the three brackets will be applied.
The Big Unknown (???)
Where the taxable income levels are set for the tax brackets will be one of the most hotly debated issues. This is the reason they have yet to disclose what they have in mind. For purposes of my quick analysis for the client yesterday, I based my calculations as if the 25% bracket will start where it does now at $75,301 of taxable income for a couple Married Filing Jointly (MFJ) and the 35% bracket will start where it does now at $416,701 for MFJ.
My client had taxable income last year of $340,296 putting him and his wife in the 33% bracket (The 33% Bracket Range was Taxable Incomes from $233,351 – $416,700 for Married Filing Jointly).
If the Tax Bracket Break Points Remain the Same
Tax Savings due to 33% Bracket being reduced to 25% – calculated as follows: (340,296 – 231,450) x (.33 – .25) = $8,555 SAVINGS
Tax Savings due to 28% Bracket being reduced to 25% – calculated as follows: (231,451 – 151,901) x (.28 – .25) = $2,386 SAVINGS
Tax Savings due to 15% Bracket being reduced to 12% – calculated as follows: (75,300 – 24,000) x (.15 – .12) = $1,539 SAVINGS
Net Impact to this Client – $9,590 Tax Reduction
Final Thoughts
What happens with these tax change proposals is, when they make a change, that change may affect one or more other existing provisions of the tax code. It causes a “domino effect”. Existing provisions that are not addressed in the proposal often end up in the domino bucket and the IRS has to make a correction or change later to clean up the dominos.
If you have concerns about how the proposed Trump Tax Plan could affect you, call me at (256) 586-4111.
Facebook Comments