Trump proposes to simplify the tax code by reducing the number of tax brackets from seven to three: 10%, 25%, and 35%. The standard deduction for a married couple would double to $24,000. The “death” tax and alternative minimum tax would be eliminated. Child and dependent care expenses would be deductible. Business tax rates would lower to 15% and the maximum dividend and capital gain tax rate would slip to 20%.
It appears the proposal would benefit nearly every taxpayer who uses the standard deduction.
The income tax rate tables can be approximated from the Trump campaign proposals to be 10% for $0—$75300, 25% for $75,301—$225,000, and 35% for $225,001 or more.
Any joint filing couple earning less than $200,000 that use the standard deduction will experience a tax reduction under the proposal. For example, a couple with no dependents earning a household income of $125,000 would experience a nearly $6,000 annual savings. If they have children they can also deduct child care expenses under the proposal for additional significant savings.
Those who itemize will not fare so well. The Trump proposal will eliminate the deduction of state and local taxes.
Only about 30% of taxpayers itemize deductions now. With Trump’s proposal to double the standard deduction (e.g. $24,000 vs $12,600 for married filing jointly) that percentage will decline even further to an estimated 10% of filers. The standard deduction is used by all others.
Itemizers are mostly in the highest income levels. Over 90% of those earning more than $200,000 per year itemize their deductions according to the Tax Policy Center. High income itemizers are concentrated in high tax states. According to the Wall Street Journal, “38% of the deduction’s value goes to California, New York and New Jersey.”
A couple living and working in and around New York City and earning $1 million a year needs to worry. They are likely paying tens of thousands of dollars in property taxes and 12.7% in state and city income taxes. The same holds true in other high cost housing and high income areas of the Northeast and West Coast.
The proposal looks like a winner for the vast majority of income tax filers. If you earn less than $200,000 in household income and typically use the standard deduction it is very likely you will benefit. The child care deduction will be very appealing to families.
If you itemize and have high income and live in a high housing cost area you will look at the elimination of the local and state tax deduction with great concern. However, the other elements of the proposal such as the elimination of the alternative minimum tax and the death tax may mitigate any potential loss.
Trump's proposal is worth serious consideration.