President Trump released the outline for his tax reform proposal last week, checking off one of his 100-day agenda items. The plan is being dubbed as the biggest slashing of taxes ever by supporters and burdensome and unrealistic by opponents. Trump has a legislative battle ahead of him for sure.
Here are 5 things you need to know about the plan:
1. The number of tax brackets would be reduced to three: 10%, 25%, and 35%.
Currently, the tax code includes seven brackets, so reducing it to only three could streamline and simplify the tax code. Reducing the number of tax brackets also provides an across-the-board tax cut, as the top rate would be reduced from nearly 40% to 35%.
2. The estate tax, alternative minimum tax (AMT), and the Obamacare surcharge would be eliminated.
The estate tax affects estates worth over $5.45 million upon the owner’s death; the AMT is a supplemental income tax (in addition to regular income tax) required for certain individuals, estates, and trusts; and the Obamacare surcharge is a 3.8 percent tax on capital gains and dividends. All three would be eliminated under Trump’s plan.
3. With exception of charitable and mortgage deductions, personal deductions would be stricken from the tax code.
Home office deductions, employee business expenses, transportation expenses, childcare expenses, student loan expenses, state and local tax payments, literally all personal deductions aside from charitable contributions and mortgage expense, would be eliminated under Trump’s plan.
4. The corporate tax rate would drop to 15%.
The U.S. corporate tax rate currently stands at 35%, third highest in the world.
5. The standard deduction would double.
Trump's proposal would increase the standard deduction from $6,300 to $12,600 for individuals and married couples filing separately, and from $12,700 to $24,000 for married couples filing jointly.
What has been released so far is only the outline, so more details are likely to come in the ensuing days.
Not surprisingly, there’s some staunch opposition brewing. So what chance does this plan have? Decent, provided the full details of the plan are disclosed and it can be deemed to be revenue neutral, or if it expires once it reaches the 10-year threshold. If that happens, the tax plan can be passed through Congress by a simple majority in the Senate through the reconciliation process. If that all happens, my guess is that it’s as good as passed, as conservatives are unlikely to object to a plan that also does not include border taxes, Value-Added Taxes, or increased infrastructure spending. But that is a big ‘if’. Getting full details released and proving the plan is revenue neutral is not an easy task. Trump has his work cut out for him, indeed.
Tax reform does not come easy. Keep your eyes on this plan though, as it has tremendous ability to impact your personal and business finances.