Paying federal taxes is one of the most popular topics under discussion in politics today, and every presidential administration makes changes that it thinks will improve the country in some manner. In 2017, both houses of Congress and the Trump Administration have made taxes an important part of the legislative session. With so much publicity over the Trump tax cut, many citizens around the country have begun to wonder how their taxes might change should Congress pass a major tax cut.
With instruction booklets that reach hundreds of pages and dozens of forms to consider, taxes often require professional assistance to complete. According to the Tax Policy Center, these are the major points contained within the plan offered by Donald Trump’s administration:
- Reduction of marginal tax rates for individuals and businesses
- A large increase of the standard deduction of up to four times the current amount
- Expenditure reductions for government programs like Medicare
- Elimination or reduction of tax breaks related to mortgage and student loan interest
What do those changes mean for the average taxpayer? It depends on the income a taxpayer earns each year, as well as his or her assets. While experts and politicians have made several arguments for and against the tax cut, there are some basic details contained within the plan that are easily deciphered.
Changes to the Standard Deduction and Personal Exemption Deductions
The standard deduction is the term used to describe the amount of income a tax payer may take away from his or her earned income for the year. For example, an individual with $50,000 in income each year would use the standard deduction for single taxpayers. At $6,300 (before any potential changes to the tax code), that tax payer would subtract $6,300 from $50,000 and report $43,700 as earned income to the government.
The benefit of the standard deduction is that the tax payer would pay income tax based on $43,700 of income rather than the full $50,000 that he or she earned for the year. Under the proposed tax plan submitted by the GOP-led House of Representatives, the standard deduction for a single tax payer would change from $6,300 to $12,000; however, the plan would eliminate the personal exemption.
The personal exemption under current tax law allows the single filer to deduct an additional $4,050 in income, which means that $50,000 becomes $39,650 under current tax law but would be $38,000 under the new law. So, although the proposed tax plan advertises that it “doubles” the standard deduction, the elimination of the personal exemption means that the GOP tax plan only increases the overall deduction amount by a small percentage.
An Aim for a Simpler Tax Code and Tax Forms
One of the goals of the GOP-led tax cut proposal is a reduction in the complexity of federal taxes. A reduction in the number of different marginal income tax rates from seven brackets to four would, as proponents suggest, make paying taxes easier, as well as reduce taxes for high wealth earners bringing in more than $480,050 a year.
Current tax rates for federal income tax start at 10% and reach 39.6%, and the proposed tax rates would start at 12% and top out to 39.6%. According to a chart published by the New York Times, the current 10% rate is paid by earners bringing in $19,050 or less each year. The GOP proposal would change that rate to 12% for earners bringing in income up to $90,000.
One of the biggest changes to the tax code would be the elimination of the Alternative Minimum Tax.
“The bill would repeal the individual Alternative Minimum Tax — which primarily affects households with incomes from $200,000 to $1 million — and would maintain preferential rates for investment income. It would also repeal the estate tax after six years, in the meantime doubling the amount of inherited wealth that is exempt from the tax to $11 million from $5.5 million.”
Is it Time to Prepare for the Trump Tax Cut?
As virtually everyone knows, the speed at which Congress moves when it comes to major legislation is glacial, and it’s not certain whether the proposed tax cut will reach a final vote in its current format. Because no one is really sure whether taxes for certain income groups will increase or decrease under the plan, it’s important that tax payers prepare to pay their taxes for the 2017 tax year as normal without any consideration of tax code changes.
It may prove beneficial to speak with a tax professional to discuss changes that may already be on the books since the tax code does change somewhat each year. From small increases or decreases in allowable deductions to expirations of various tax benefits, every new tax year does tend to bring a few surprises on tax day.
Are You Facing Bankruptcy or Tax Issues?
If you are considering filing for bankruptcy, you may wish to download our free guide: 12 Things You Should Know Before Filing for Bankruptcy. While bankruptcy isn’t the answer to every financial problem, it may help you make a decision about your financial future. If you have questions about tax and IRS issues, contact us for a free consultation.
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