What Does Trump’s Tax Plan Mean for the Average Taxpayer?

Three-quarters of the proposed tax cuts will go to taxpayers whose incomes are in the top 1% according to certain analysis.

New President Donald Trump and the Republican-controlled Congress are expected to enact in 2017 the most sweeping tax changes in over 30 years. No one knows what the final result will be; but Donald Trump has published an outline of the changes he wants Congress to adopt. What does the Trump tax plan mean for individual taxpayers?

New Tax Brackets and Tax Rates

The current federal income tax has seven tax brackets for ordinary income (the money you earn from a job, business, or interest income). These range from a tax rate tax rate of 10% to 39.6% for very high income taxpayers as shown in the following table:

2016 Federal Personal Income Tax Brackets

Tax Bracket

Income If Single

Income If Married Filing Jointly

10%

Up to $9,275

Up to $18,550

15%

$9,276 to $37,650

$18,551 to $75,300

25%

$37,651 to $91,150

$75,301 to $151,900

28%

$91,151 to $190,150

$151,901 to $231,450

33%

$190,151 to $413,350

$231,451 to $413,350

35%

$413,351 to $415,050

$413,351 to $466,950

39.6%

All over $415,050

All over $466,950

The Trump tax plan replaces the current system with three tax brackets, with rates of 12%, 25% and 33%.

Trump Tax Plan Personal Income Tax Brackets

Tax Bracket

Income If Single

Income If Married Filing Jointly

12%

Up to $37,500

Up to $75,000

25%

$37,501 to $112,500

$75,501 to $225,000

33%

all over $112,500

all over $225,000

The income you earn from selling capital assets you own over one year—things like your home or stocks—is taxed at lower capital gains rates, as are corporate dividends. Under current law, the capital gains tax rate is 15% for most taxpayers, but reaches 20% for those in the 39.6% income tax bracket. Under Trump’s plan, capital gains would be tax at 0 for taxpayers in the 12% bracket, 15% for those in the middle 25% bracket, and 20% for those in the top 33% bracket.

Increased Standard Deduction, No Personal Exemptions

All individuals taxpayers who don’t itemize their personal deductions get to take the standard deduction. The amount is based on a taxpayer’s filing status. In 2017, the standard deduction is $6,300 for singles, $12,600 for marrieds and $9,300 for heads of households. Trump’s plan increases the standard deduction to $15,000 for single filers and $30,000 for married couples filing jointly. However, the plan also eliminates the personal exemption, which is $4,050 for an individual taxpayer, his or her spouse, and their dependents. This change benefits childless adults and hurts middle class households with children.

Cap on Itemized Deductions

Individuals who don’t take the standard deduction, may claim a number of itemized deductions instead. These include deductions for medical expenses (over certain limits), charitable contributions, mortgage interest, state and local taxes, and unreimbursed employee expenses. Trump’s plan caps the amount of all itemized deductions taxpayers may claim at $100,000 for single filers and $200,000 for married couples filing jointly. Current law reduces itemized deductions for high income taxpayers (single taxpayers with income over $250,000 and married with income over $300,000), but it does not cap them like the Trump plan does.

New Childcare Deduction

The Trump plan calls for a new deduction for parents of children under age 13 that will be capped at the state average for the age of the child, and for eldercare for a dependent. This will be an “above the line” deduction that all individual taxpayers can take whether or not they itemize their personal deductions. This deduction is phased out for individual taxpayers earning more than $250,000 or couples earning more than $500,000. Lower-income families will be entitled to a tax credit of up to $1,200 per year for childcare expenses.

Elimination of Taxes

The Trump plan entirely eliminates three taxes that fall on higher income taxpayers.

Net Investment Income Tax

Singles with income over $200,000 and marrieds filing jointly with income over $250,000—must currently pay a 3.8% on their net investment income—things like interest, rents, royalties, and passive business income. This brings their real top tax rate 43.4%, not 39.6%. Trump will eliminate this 3.8% tax entirely.

Alternative Minimum Tax

The alternative minimum tax is a supplemental income tax intended to force higher income taxpayers who qualify for substantial tax deductions to pay at least some income tax. The Trump plan eliminates this tax as well.

Estate Tax

Under current law, a federal 40% estate tax applies to estates worth more than $5.45 million ($10.9 million for married couples). Trump’s plan eliminates all estate and gift taxes.

The Bottom Line

Trump’s plan cuts income taxes for almost all taxpayers, but the wealthy will receive the largest cuts, as shown in the following chart which is based on data from the Tax Foundation and Tax Policy Center. Indeed, three-quarters of the tax cuts will go to taxpayers whose incomes are in the top 1%.

Income

Average Annual Tax Savings Under Trump Plan

less than $48,000

$400

$48,000 to $83,000

$1,000

over $700,000

$215,000

over $3.7 million

$1 million

The Tax Foundation has a tax calculator you can use to see how much the Trump plan will save you.

Trump’s plan will reduce the tax revenue collected by the federal government—just how much no one knows for sure. It depends on how much the plan’s reduced taxes spur economic growth. The Tax Foundation estimates the reduction at anywhere from $2.6 trillion to $3.9 trillion over 10 years.

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