President Trump recently released his income tax proposals, as part of his planned budget overhaul. While no changes have yet been approved, you might be wondering how any alterations to IRS code could affect your personal and business income taxes. This is what we know right now, keeping in mind that each of these proposals could be altered before they become law, or scrapped completely in favor of something else.
Fewer personal income tax brackets, and lower tax rates for some. The plan reduces the number of personal income tax brackets from seven, to just three. Those brackets would impose a tax rate of 12, 25, and 33 percent, depending upon income. Right now, the top bracket taxes high-income earners at 39.6 percent, so theoretically the 33-percent rate could result in lower taxes for that group.
Higher standard deductions, with fewer taxpayers choosing to itemize. The plan also proposes an increase to standard deductions, to $15,000 for single taxpayers and $30,000 for married couples. At the same time, the plan would cap personal exemptions at $100,000 for singles and $200,000 for couples. Theoretically, only about 5 percent of taxpayers would still choose to file an itemized return, down from the current 33 percent.
No more Alternative Minimum Tax. Trump’s plan eliminates the Alternative Minimum Tax, which has long been viewed as a burden on small business owners.
Lower tax rates on corporate business income. Currently, businesses pay income tax rates of 35 percent. President Trump hopes to lower that rate to just 15 percent, in hopes of providing relief to business owners.
Elimination of the net investment income tax. Often called the “Obamacare tax” because it was introduced through the Affordable Care Act, many taxpayers current owe a 3.8 percent levy on their net investment income. Trump has said repeatedly that he hopes to eliminate this unpopular tax, although he had hoped to do so through a repeal of the ACA rather than via his tax proposal.
As with all proposed changes to the law, it’s better not to count on these changes as they move through Congress. Typically, a president’s proposals do not become law without much revision. We will continue to keep you informed of changes that might affect you. In the meantime, call us to set an appointment to discuss any concerns with your financial strategy moving forward.