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7 possible reforms for individuals

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in Small Business Tax

During his campaign, President-elect Trump repeatedly vowed to cut tax rates for individuals, while simplifying the tax code.

Alert: House GOP members released their own tax plan last year. The plan is similar to Trump’s.

Accordingly, these seven tax changes may be approved this year, with possible modifications by Congress.

1. Tax rate structure: Trump has proposed reducing the current seven-tier structure—with a bottom bracket of 10% and a top bracket of 39.6%—to just three tax brackets of 12%, 25% and 33%.

Proposed tax rates

Although he hasn’t specified the income ranges, the House GOP plan, which uses the same three brackets, uses these figures.

Trump would also eliminate head-of-household filing status, which under the current rules gives qualified taxpayers more favorable tax brackets and a bigger standard deduction than for singles.

2. Standard deduction: Under current law, the standard deduction for 2017 is set at $6,350 for single filers and $12,700 for joint filers, based on indexing. Trump’s plan would increase the standard deduction to $15,000 for single filers and $30,000 for joint filers. The net effect of these increases would be that fewer taxpayers would itemize deductions, especially when combined with other proposed changes.

3. Itemized deductions: Trump wants to curb itemized deductions for individual taxpayers. Instead of eliminating deductions as initially proposed, his website indicates that he would now place an annual limit of $100,000 on itemized deductions for single filers and $200,000 for joint filers. This change would eliminate the current itemized deduction phase-out rule.

4. Personal exemptions: The latest plan from Trump’s camp would completely repeal personal and dependent exemptions deductions. If this change is enacted, the personal and dependent exemption phase-out rule for higher-income taxpayers would be eliminated.

5. Alternative minimum tax: The alternative minimum tax (AMT)—which would be repealed by the Trump tax plan—has become more likely to target people in upper-middle-income brackets who live in high-tax states and have several personal and dependent exemption deductions.

6. Net investment income tax: Currently, a 3.8% Medicare surtax applies the lesser of net investment income (NII) or the excess of modified adjusted gross income (MAGI) over an annual threshold of $200,000 for single filers and $250,000 for joint filers. This tax provision was added by the Affordable Care Act (ACA). Repealing the ACA, as Trump has advocated, would also wipe out the NII tax.

7. Child and dependent care: Trump has proposed several reforms relating to child care expenses of parents, including the following:

  • Increasing the earned income tax credit
  • Providing an above-the-line deduction for dependent care expenses
  • Creating tax-favored savings accounts for dependent care expenses.

Tip: Finally, Trump would also enhance the tax rules for employer-provided child care expenses.

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