What Does 2017 Hold for Your Taxes?

By Matthew Frankel Markets Fool.com

President-elect Donald Trump's tax plan would represent the biggest overhaul to the U.S. tax code in decades. And with a Republican majority in both houses of Congress, he may actually be able to get his way. While most people would get a tax cut under Trump's plan, this wouldn't necessarily be the case for all Americans, so here's what you need to know.

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Image Source: Disney-ABC Television Group via Flickr.

Fewer, lower tax brackets

Currently, there are seven IRS tax brackets, and you can find the income thresholds for 2017 here.

Trump has proposed consolidating these into just three brackets, with marginal tax rates of 12%, 25%, and 33%. He also plans to eliminate the so-called marriage penalty by simply making the single tax brackets exactly half of the amounts for married couples filing jointly.

Marginal tax rate

Taxable Income (Single Filers)

Taxable Income (Married Joint Filers)

12%

$0-$37,500

$0-$75,000

25%

$37,500-$112,500

$75,000-$225,000

33%

$112,500 and above

$225,000 and above

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Data source: www.donaldjtrump.com.

Clearly, this would be a major simplification to the tax code. If you looked at the 2017 tax bracket article I linked at the beginning of this section, you'd notice that what took four large tables to describe has been condensed into just one. It would also represent a lower marginal tax rate for most (but not all) Americans.

Higher standard deduction

In addition to generally lower tax rates, Trump's tax plan also calls for increasing the standard deduction from $6,300 for single filers and $12,600 for married couples filing jointly to $15,000 and $30,000, respectively.

Filing Status

Trump's Proposed Standard Deduction

Current Standard Deduction (2017)

Married filing jointly

$30,000

$12,700

Married filing separately

$15,000

$6,350

Head of household

N/A

$9,350

Single

$15,000

$6,350

Data sources: IRS, www.donaldjtrump.com.

This would represent a significant tax break for many people, since the tax brackets are based on taxable income, which is lowered by deductions. For example, a married couple who earn $75,000 in 2017 and choose the standard deduction would be taxed on only $45,000 of this amount, assuming they didn't have any other credits or deductions to use.

But, no more exemptions or heads of household

Despite Trump's lower proposed tax brackets and higher standard deduction, taxes wouldn't necessarily go down for all Americans, and for two specific reasons.

First, Trump's plan includes the elimination of the personal exemption, which currently excludes $4,050 in income from taxation for every taxpayer, spouse, and dependent. In other words, if you're a married couple with two children, you're currently entitled to four personal exemptions, which reduce your taxable income by $16,200.

You can read about the mathematics of how this works here, but essentially, married couples with more than two children will lose more from the elimination of the personal exemption than they would gain from the higher standard deduction. Taxpayers of other filing statuses with dependents could face a similar increase as well.

Second, Trump has proposed eliminating the head-of-household filing status, which currently has a higher standard deduction and more favorable tax brackets than the single filing status, and is used by more than 22 million taxpayers annually. Under Trump's plan, taxpayers who currently qualify as heads of household would most likely have to file as single, thereby losing these benefits.

Expanded child care benefits

One wild card that could help to offset both of these changes is Trump's proposal to expand tax benefits for child care. His tax plan included an increased deduction for child care expenses that would be capped at the average cost of care in each state.

While it's unclear exactly how this deduction would be structured, it could certainly save Americans significant money, especially those with several children.

Under current IRS law, the Child and Dependent Care Tax Credit is worth between 20% and 35% (depending on a filer's income) of the first $3,000 in qualified expenses for one child, or $6,000 worth of expenses for two. Families with more than two children get no additional benefit.

So the maximum credit for a family with, say, three young children, would be between $1,200 and $2,100, depending on the credit percentage they qualify for, no matter how much they spend. Meanwhile, if this family spent a total of $15,000 on child care throughout the year, this translates to $3,750 in tax savings if the family falls into Trump's 25% bracket.

In addition, Trump plans to expand the Earned Income Tax Credit to further assist low-income families with child care expenses, and would establish tax-advantaged Dependent Care Savings Accounts to help families save for these costs. You can read more about Trump's child tax benefits here.

Where Trump is likely to run into resistance

Most of Donald Trump's tax plan is in line with the Republican Party platform, and therefore should be met with little resistance. However, one area where the two plans differ is deductions. Specifically, Trump wants to allow taxpayers to keep most of their deductions, while the GOP platform calls for the removal of most deductions, other than mortgage interest and charitable contributions.

Since most independent analyses of Trump's plan find that it is far from revenue-neutral, Trump will likely have to compromise when it comes to which deductions will be kept and eliminated.

The bottom line is that, while these are the details of Trump's tax plan and it's likely that some tax changes will be implemented during his presidency, there is no guarantee that the changes will line up exactly with the ones discussed here. In addition, keep in mind that there's also no guarantee that whatever changes do occur will be made retroactive to Jan. 1, 2017. Therefore, it's important to know what to expect if our new president gets his way, as well as to understand the current tax structure (tax brackets, filing status, exemptions, and deductions), and what both could mean for you in 2017.

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