One of the many promises President Trump made throughout his campaign was to simplify the current tax code. This has been on the Republican’s agenda for quite a while and now with a Republican president and majority power in both houses of Congress, they hope to make some changes soon.
Although Trump and the House Republicans don’t agree on all the proposed tax changes, they do agree that the tax code is too large, too complicated and too burdensome for corporations and small businesses.
Since Trump was elected, the stock market has gone on a rally, mostly based on the optimism that lower corporate taxes and deregulation will spur economic growth. In addition to proposed lower corporate taxes, here are the three biggest changes Trump proposes to the individual tax code. (For related reading, see: Why America's Biggest Creditors Are Selling Treasuries.)
Reduce the Number of Tax Brackets
Currently we have seven marginal tax brackets that range from 10% to 39.6%.
Trump plans on reducing those brackets down to three. For married couples filing jointly, income up to $75,000 will be taxed at 12%, income between $75,001 and $225,000 will be taxed at 25%, and all income above $225,000 will be taxed at 33%.
Although the number of tax brackets will be reduced, your tax liability could increase or decrease depending on your amount of taxable income.
Repeal the Medicare Surtax, Keep the Preferential Capital Gain and Dividend Tax Rates
As part of the Affordable Care Act, any net investment income for a married couple filing jointly with adjusted gross income (AGI) above $250,000 is subject to a 3.8% Medicare surtax. Trump plans on repealing this surtax while ensuring that the capital gains and qualified dividend tax rate stays the same.
Currently capital gains and qualified dividends are taxed at three different preferential rates. If you fall in the 10% or 15% tax bracket, your capital gains and dividends are not taxed. If you fall in the 25%, 28%, 33% or 35% tax bracket, they're taxed at 15%. For those in the top bracket of 39.6%, the rate is 20%.
Trump proposes keeping the same three preferential tax rates with the 0% rate for those in the 12% bracket, the 15% rate for those in the 25% bracket, and the 20% rate for those in the 33% bracket. (For related reading, see: How to Invest During Trump's Presidency.)
Consolidate the Standard Deduction and Personal Exemptions
Currently the standard deduction for a married couple filing jointly is $12,600. In addition to the standard deduction you are able to claim an exemption for yourself and every member in your household that is considered a dependent. Each exemption is equal to a $4,000 deduction.
Trump's proposal is to consolidate the standard deduction and the personal exemptions into one larger standard deduction worth $30,000 for married couples filing jointly. While this could help small families who don't itemize deductions, it will hurt larger families who do itemize.
Just like everything in personal finance, your own unique situation will determine whether or not Trump's proposed tax plan will increase or decrease your personal tax liability. It's tough to determine which of Trump's proposals will be enacted as law and even harder to determine how long it will take. However, it is important to keep the proposals in mind as you work with your tax and financial professionals throughout the next year. (For related reading, see: Middle America Won't Benefit as Much From Trump.)
(For more from this author, see: Target Date Funds: Understanding the Benefits & Risks.)