President Donald Trump proposed big changes to the U.S. tax system on the campaign trail, but Wednesday’s announcement of the White House’s new tax plan may mark the start of where the rubber meets the road for many Americans and their tax bills.
What does it mean for you? Here’s a guide to what is (and isn’t) in the plan.
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What’s in the plan
The proposed changes would affect virtually all taxpayers in some way, though the impact would depend on your individual situation.
- Fewer income tax brackets: It starts with reducing the number of federal income tax brackets from seven to three: 10%, 25% and 35%.
- Eliminate almost every individual tax deduction: Except those for mortgage interest and charitable contributions. The plan specifically preserves those. A big one here would be the elimination of the ability to deduct state and local taxes, a move that could hurt residents of high-tax states such as California and New York.
- Double the standard deduction: The IRS offers this deduction on a no-questions-asked basis. It’s subtracted from your adjusted gross income and lowers your taxable income. The standard deduction in 2017 is currently $12,700 for joint filers and $6,350 for single filers. The new plan proposes to roughly double that amount.
- Relief for families with child and dependent care expenses: This is notable as a plan priority. Some tax benefits already exist for child and dependent care, but during the campaign Trump proposed tax deductions for child care and elder care expenses, a child care spending rebate to low-income parents and deductible contributions to Dependent Care Savings Accounts. Specifics of the new plan have not yet been given, however.
- Repeal the alternative minimum tax: The AMT is an alternative method of calculating federal income tax that runs parallel to the ordinary method. Currently, taxpayers have to calculate their tax liability two times, once under each method, and pay whichever amount is higher.
- Repeal the estate tax. This tax is levied on assets passed on to your heirs upon your death. In 2017, up to $5.49 million of an estate is already exempt from federal taxation. A repeal likely would affect only people who expect to inherit large estates.
- Repeal the Affordable Care Act net investment income tax. This is a 3.8% tax some people must pay on their investment income, introduced to help pay for President Obama’s health care law. Couples with combined incomes above $250,000 could get a reprieve here.
- Reduce the corporate tax rate to 15% and extend it to certain small and medium-sized businesses. Freelancers, the self-employed and other companies could get a tax break, though the details will determine how much.
What details weren’t provided?
Lots of them.
Without knowing the size of the tax brackets, for example, it’s hard to determine which taxpayers will come out ahead in the shuffle between losing certain itemized deductions and moving to a lower tax bracket.
It’s unclear what would happen to the tax treatment on retirement contributions, such as to a 401(k) or individual retirement account, although National Economic Council Director Gary Cohn — who along with Treasury Secretary Steve Mnuchin announced the plan at a press briefing — said “retirement savings will be protected.”
It’s also impossible to know what sorts of new or different tax breaks will be available for child care or elder care.
» MORE: Calculate your tax burden
The White House said it plans to move quickly, working with the House and Senate to flesh out the fine print and draw up a bill. Any change in tax policy or rates must be approved by Congress.
Tina Orem is a staff writer at NerdWallet, a personal finance website. Email: firstname.lastname@example.org.