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GOP leaders are shifting their focus to tax reform after a series of failed attempts to change healthcare laws.
The Trump administration on Wednesday proposed dramatic changes and simplifications to the federal tax code.
A proposed tax framework reveals plans to consolidate the current tax brackets, eliminate several exemptions and deductions as well as cut individual and corporate taxes. The plan calls for concrete changes and leaves other questions to be determined later.
The 9News Verify team reviewed the tax reform plan to help you understand what changes might affect you and what’s still up in the air.
FEWER BRACKETS & INCREASED STANDARD DEDUCTION
Currently, the federal income tax has seven brackets: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.
The new plan consolidates the seven tax brackets into three: 12%, 25%, 35%.
However, the new plan suggests that congress might add a fourth bracket if needed - higher than the 35% - applied to the highest-income taxpayers.
The biggest unknown here is the income levels for each tax bracket, which makes a huge difference since the jump between the 12% and 25% brackets is more than double.
Expect a spirited debate over where to draw the lines for the new brackets.
As the brackets currently stand, an individual would need to make more than $37,650 and a couple more than $75,301 to fall into the 25% bracket.
This is in effort to “ensure that the reformed tax code is at least as progressive as the existing tax code and does not shift the tax burden from high-income to lower- and middle – income taxpayers,” according to the tax reform framework.
The proposal also nearly doubles the standard deduction, which reduces the total income on which someone is taxed. But the loss of exemptions will reduce the effect of this increase.
The standard deduction would increase from $6,350 to $12,000 for individuals and from $12,700 to $24,000 for married taxpayers.
“These changes simplify tax filing and effectively create a larger ‘zero tax bracket’ by eliminating taxes on the first $24,000 of income earned by a married couple and $12,000 earned by a single individual,” according to the tax reform framework.
But it is important to note that personal exemptions are eliminated under the new plan, which takes away the additional income reduction before taxes are calculated.
In 2017, those exemptions were equivalent to $4,050, or $9,100 for a couple, subtracted on top of the standard deduction.
The following graphic breaks down how Trump’s plan compares to the current law for a couple earning $75,000.
Trump’s plan would result in a tax savings for this couple of $933, assuming that this income level stays below the 25 percent bracket.
Again, Congress will set the income levels for bracket at a later time—so it’s too early to say with certainty who will pay what tax rate.
CREDITS & ITEMIZED DEDUCTIONS
The proposal repeals personal exemptions for dependents, but calls for increasing the child tax credit from the current $1,000 depending on the parents’ income level.
It also creates a $500 tax credit for dependents who are not children – such as the elderly.
The framework gets rid of most itemized deductions, but fails to specify what that specifically includes– leaving medical and dental expenses, state and local taxes, casualty and theft losses, job expenses potentially on the chopping block.
It does, however, promise to keep tax incentives for home mortgage interest and charitable contributions.
The plan also preserves tax benefits to encourage work, higher education and retirement security.
The proposal does not say whether the remaining itemized deductions can be applied in addition to the standard deduction.
If not, it means an individual would need more $12,000 or couple more than $24,000 of itemized deductions for there to be a tax incentive to give to charities or take out a mortgage.
According to the 2016 IRS tax statistics, 69% of taxpayers claim standard deductions and nearly 30% claim itemized deductions.
SMALL BUSINESSES & CORPORATIONS
The proposal would limit the maximum tax rate to 25% for income of small and family-owned businesses that are sole proprietorships, partnerships and S corporations.
It also would reduce the corporate tax rate to 20% from 35% - which is similar to or slightly less than other industrialized nations.
Under the proposal the deduction for net interest expense would be limited, but businesses could immediately expense new investments, an ability that would only last for five years.
Business tax deductions involving research and development and low-income housing would remain, while others would be repealed.
The plan also calls for a shift from a worldwide to a territorial tax system.
“It ends the perverse incentive to keep foreign profits offshore by exempting them when they are repatriated to the United States,” according to the framework.
The plan includes taxing the foreign profits of U.S. multinational corporations at a lower tax rate in an effort to stop corporations from shipping jobs and money overseas.
The framework is exactly that—a guide that shows what Republicans would like to do to the structure of our tax laws. It’s lacking some important specifics, but does allow you to guess at what might happen to your own tax bill based on the changes proposed.
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