In a previous post, I discussed current tax bracket falicy and the amount of tax we all pay each year based on this, or what we think we pay. President Trump has just announced his tax revision strategy, albeit a skim overview.
Right out of the gate, Trump wants to reduce the tax brackets from seven to three. So far so good. The proposed bracket structure will now be 10%, 25%, and 35%. There is little indication as to the income levels of these brackets yet, but there have been opinions based on Trumps original thesis.
President Trump also wants to increase the standard deductions for single ($12,700) and married ($24,000) filers. This roughly doubles the standard deductions of the most recent tax year. However, increasing the standard deduction will mean most deductions that were previously itemized, will no longer be eligible. Interestingly, Trump has agreed to continue the pre-tax investment, mortgage interest and charitable contribution deductions. According to an article on Doughroller these deductions will be allowed in conjunction with the standard deductions. There is some discussion as well for allowing some form of incentive or savings plan for child and elder care, but information on this is limited.
The Trump tax plan also wants to eliminate the 3.8% net income investment tax paid by individuals making over $200.000 and married families making $250,000 that is used to subsidize Obamacare. This is important, however I don’t know of too many folks that will be impacted by this.
Trump also wants to eliminate the “Death Tax” (Estate Tax). This tax does not come into play for folks who inherit assets under ~5.5 million dollars, and in fact according to the Congressional Joint Commission on Taxes, only 0.2% of Americans pay this tax and another data point from the Tax Policy Center stated that in 2013 only 20 small businesses and farms paid an estate tax.
I take data points like this with a grain of salt, but it is clear, the average farmer and small business family is rarely being impacted by the estate tax. This tax is simply to prevent frugal folks like us who are building wealth and saving for our families future from becoming the next Rockefeller or Mellon. So forget all of the nonsense and scare tactics spewed by our politicians saying that the death tax will hurt our farmers and small business owners, it simply is just more political positioning.
Corporate tax rates will drop to 15% for all businesses, this can mean a savings of up to 20% for a business and that money can be put right back into the business, passed on to the consumer in lower costs for services, or paid to shareholders. Trump also plans to bring back the 2 trillion dollars held overseas by American companies by offering a one time fee for doing so which is likely very enticing to most companies. These are funds that can be put to work right away for the American economy.
So what does this all mean for you and me? Let’s do a little math. To keep this exercise reasonable lets take two families, the first making 75k a year and the second making 150k a year.
The $75k a year family will deduct $24k (standard deduction) from their taxable income right away leaving them with a gross tax burden of $51k. If they own a home paying mortgage interest ($2k), and contribute 10% to their employee retirement fund ($7.5k) and make charitable contributions, i.e. tithe, at 10% ($7.5k) these are also eligible for deduction of tax burden in addition to the standard deduction, according to Michael Pruser. After it’s all said and done, this family that made a gross income of $75k is now on the hook for an estimated $34k adjusted federal tax liability. According to Pruser, this family will fall under the 10% tax bracket, whereas without tax reform, they are in a 15% bracket.
Considering the family making $150k a year will likely look like this: $150k minus the standard deduction leaves $126k. Subtract mortgage interest ($4k), tax deferred investments ($15k) as well as charitable contributions ($15k) and this leaves a final tax burden of $92k a year which would currently put them in the 25% (realized tax likely a little lower) tax bracket. The same income will put them on the hook for around a 10% tax burden (realized) under the Trump plan.
At this point these calculation are all conjecture, because we really have no idea what will happen at this point. Barring a few minor arithmetic errors it should be clear that anything close to what Trump is proposing should be helpful to most Americans.
These are typical examples of families that I know. Of course not everyone will have the same deductions, give or take, but it does present a better picture of the incentive for the middle class to urge these reforms on.
Critics of this plan are saying two things: 1) This plan will increase the deficit by as much as 2 fold in 10 years, and 2) This is a tax break for the rich. I say, HOGWASH!!
Point #1 Increasing the Deficit.
Yes I agree the deficit may likely increase during the next 10 years based on Trumps tax reform plan, but we all seem to forget several important facts. The national deficit nearly doubled under the Obama administration while increasing every Americans tax burden. If the deficit is going to increase, at least Trump will ease the pain for most Americans. We are also forgetting what these tax incentives will do for the economy, putting this much money back into the pockets of the American people and bringing businesses back will only stimulate the economy to higher levels.
Point #2 This is a Tax Break for the Rich.
I completely agree, but it also helps the middle class as well and the economy which will likely circle around and help us all. Don’t get me wrong, I sympathize with the burdens upon Americans who are struggling with their finances and are low income earners, I grew up in one of these households, but when almost 80% of the taxes are paid by 16% of the people, and considering 45% of Americans will pay no income tax at all, I think the “rich” deserve a break. God only asks for 10% from us all, not 0% from the poor and 40% from the rich, so we can all serve him equally.
There are other considerations as well, tax reform is only half the picture, there has to be a tightening of the belt and reduce (or eliminate!) the frivolous government spending. We have all heard of the $500 hammer, and this nonsense just has to stop. Government spending is outrageous and the politicians who are funding their pet projects need to stop and be held accountable.
Considering Trumps plan for tax revision and simplification, I see no reason why most Americans would be filing anything other than a version of the 1040EZ. By simplifying the tax code, I cannot envision the need to continue spending 12 billion dollars a year on the IRS. In fact, I see no reason why this department could not see a cut in services by at least 50% initially and work toward a 90% reduction in 4-5 years.
I have seen enough of the Trump machine to realize that this tax plan will likely not come to fruition as it sits now. Trump has a track record of making big, bold statements and then scaling them back to get something in the ballpark. Having said this, I am all for this plan, but even a scaled back 50% version of Trumps tax reform only makes American families and the middle class great again.