Donald Trump entered the Oval Office with a sea of campaign promises. Arguably topping that list was a pledge to completely reform the current U.S. tax code.
It's not hard to understand why his supporters would favor tax reform. The U.S. tax code now tallies more than 10 million words, according to the Tax Foundation, with an average of 144,500 words added between 1955 and 2015. Even with the help of tax software or an accountant, preparing your taxes can be an arduous and complicated process.
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There's also the belief that U.S. corporations are being dealt a tough hand with one of the highest corporate income tax rates in the world, 35%. This high tax rate encourages U.S. multinationals to invest overseas where corporate tax rates are lower, and it can also discourage foreign investment in the United States.
On Wednesday, Treasury Secretary Steven Mnuchin and National Economic Council Director Gary Cohn unveiled Trump's long-awaited tax plan to the public. Here are the 15 things you need to know about Trump's proposed tax reforms.
1. It narrows the number of tax brackets from seven to three
The highly anticipated change is that Trump's tax plan would significantly simplify the individual U.S. tax code. In particular, it would reduce the number of ordinary income tax brackets from seven (with a min. tax rate of 10% and a max tax rate of 39.6%) to just three (10%, 25%, and 35%). The specific dollar amounts of what each of the three ordinary tax brackets would correspond to weren't released.
If you recall, Trump had adopted the House Republican proposal during his campaign of three brackets at 12%, 25%, and 33%, so this new proposal isn't too far off.
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2. It doubles the standard deduction
The simplification process continues with the deductions and credits offered (which we'll touch on below). Trump's tax proposal would double the standard deduction individuals and couples are privy to in order to make up for other deductions and credits that could be taken away.
Based on the $6,350 standard deduction for single filers in 2017 and the $12,700 standard deduction for couples, we're talking about an increase to $12,700 for single filers and $25,400 for couples. Another way to look at this is the first $12,700 in income for single filers and $25,400 for couples would be exempt from taxation.
However, Trump's tax plan makes no mention of retirement-based deductions given to those who contribute to a 401(k) or a Traditional IRA, meaning these tax-reducing incentives may go away.
3. Provides added tax relief for families with children
As expected, Trump's tax plan would focus on providing families with children greater tax incentives. Though the plan didn't list any specifics, the belief is that the Additional Child Tax Credit and/or Earned Income Tax Credit would be tinkered with to provide juicier refunds to families.
4. The mortgage interest deduction would be saved
Homeowners will be happy to hear that the mortgage interest deduction is expected to be saved, per the proposal. The mortgage interest deduction, which allows most homeowners to reduce their tax liability by deducting the interest they pay on their home mortgage, is one of the largest deductions for most taxpayers.
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5. The charitable giving deduction stays, too
In addition to the mortgage interest deduction, the charitable giving deduction is expected to stick around. This is a deduction that highly favors the wealthy since the amount of the deduction correlates with an individual's peak ordinary income tax bracket. For example, an individual whose last earned dollar is in the 33% tax bracket is able to deduct $0.33 for every $1 donated to an eligible charitable organization. Lower-income folks who are in the 10% and 15% tax brackets are only able to deduct $0.10 or $0.15 for every $1 donated.
6. Eliminates the net investment income tax
Well-to-do investors will be happy to see that Trump's tax plan would eliminate the net investment income tax (NIIT) that was originally passed as a provision with the Affordable Care Act. The NIIT is a 3.8% tax rate applied to investment income for individuals with modified adjusted gross incomes (MAGIs) above $200,000 and couples with MAGI's above $250,000.
7. Removes the estate tax
Trump's tax plan would also remove the estate tax, which is also commonly referred to as the "death tax." The exemption level for the estate tax is already pretty high: $5.49 million for an individual and nearly $11 million for a couple. Removing the estate tax would allow individuals and couples to pass along their wealth to whomever they choose without the threat of federal taxation on their assets.
8. Eliminates the Alternative Minimum Tax
An additional form of tax simplification comes with the proposed elimination of the Alternative Minimum Tax, or AMT. The AMT was put in place back in 1969 to ensure that wealthier individuals aren't able to skirt paying taxes due to the plethora of deductions and credits available to the rich. In 2017, the AMT may apply to single filers earning more than $54,300 and couples filing jointly with more than $84,500 in income.
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9. Lowers the corporate income tax rate to 15%
The biggest question mark that was answered with the release of this proposal is that the U.S. corporate income tax rate would be reduced from its current 35% to 15%. The belief is that corporations being able to keep more of their income will result in reinvestment and hiring, which will fuel growth in the U.S. economy and generate extra revenue to pay for these fairly steep tax deductions.
10. Allows for a special repatriation tax rate
As expected, Trump's tax plan would allow for a one-time special tax repatriation holiday for corporations that allows them to bring back their overseas cash at a lower tax rate. Estimates suggest that around $2.5 trillion in cash is currently being held overseas. The Trump administration believes that offering corporations an incentive to bring this capital back into the U.S. could fuel reinvestment, jobs growth, and merger and acquisition activity.
11. Establishes a territorial tax system
One of the more controversial proposals within Trump's tax outline is that it would create a "territorial tax system" to encourage companies to remain headquartered in the U.S. Specifically, it would exempt company earnings abroad from taxation. This proposal also seemingly leaves the door open for a border adjustment tax, which would punish companies that rely heavily on foreign imports and reward those who export their goods.
12. Pass-through entities qualify for the lower corporate tax rate
The other highly controversial proposal is that pass-through entities, such as hedge funds and partnerships, would be taxed at the corporate income-tax rate of 15% as opposed to the individual income tax rate. Some pundits have suggested that this provision might encourage individuals to reorganize their finances in order to take advantage of this tax shelter, although Mnuchin insisted on Wednesday that this won't be the case.
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13. Republicans will target the reconciliation process
The release of this tax proposal all but confirms that House Republicans will seek to pass this plan via the budget reconciliation process. Reconciliation allows the House and Senate to change laws that specifically impact the federal budget with a simple majority vote. The catch is that any tax law passed with reconciliation will sunset in 10 years. In other words, 10 years after the Trump tax plan passes (assuming it passes), the U.S. tax code would revert back to its current form if no new plan is passed.
14. This is just a blueprint
It's important for the American public to realize that Wednesday's tax plan release is nothing more than a "blueprint" of what's to come. It's almost a given that the tax plan that's been unveiled will face changes in the Senate, and possibly even in the House.
15. The goal: 3% growth
Finally, Steven Mnuchin noted during the unveiling of Trump's tax plan that the goal of cutting individual and corporate taxes is to generate annual GDP growth in the U.S. of 3%. Whether this will be enough to offset the reduction in federal revenue collection from these tax cuts remains to be seen.
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