Initial Thoughts on Trump’s Tax Proposal

This afternoon, the president unveiled his ‘framework’ for tax reform.  After giving it a quick read-through, listening to the talking heads analyze it, and reading through it a second time, here are my initial thoughts on several things that jumped out at me:

 
Keep in mind that it’s not a tax plan, it’s ‘framework’.  It is intentionally vague, as Congress will be filling in the details as they debate the issues.  We can toss out “what-if” scenarios all day, but without knowing the details (especially the tax brackets), it’s just mindless babbling.  So, I’ll stick with what is known.

I’ve heard numerous mentions of the “near doubling” of the Standard Deduction.  This is not the case.  The proposal combines the standard deduction with the personal exemptions, lumping it into one deduction.  Currently, a non-itemizing single filer will receive a $6,350 standard deduction plus a $4,050 personal exemption (total = $10,400).  Under the proposal unveiled today, this filer would receive a flat $12,000 deduction.  That’s $1,600 less taxable income.  Awesome, right?

Now let’s look at a married couple – under current law, the non-itemizing couple would receive a $12,700 standard deduction, plus two $4,050 exemptions (total $20,800).  Again, the proposed deduction of $24,000 would benefit this couple, as there is $3,200 less taxable income.

Carrying it one step further, let’s add a child to the mix….currently this same couple would receive the $12,700 standard deduction, plus three $4,050 exemptions (total $24,850).  This family does not benefit from the proposed changes, and would be left with $850 more taxable income.  As you continue to add additional children to the mix, the amount of income subject to tax will increase by $4,050 per child.  (A married couple with two children will have $850 + $4,050 = $4,090 more taxable income, etc.)

If the much talked about “doubling” of the standard deduction was the only change, most taxpayers with children would see an increase in taxable income.

The changes to the Child Tax Credit *may* balance this out, but that section is completely lacking in detail.  Similar to current law, the first $1,000 will be refundable (ie. you get it even if you have no tax liability, in most cases). It is unclear what the new credit amount will be, or if it will be refundable.  Theoretically, a taxpayer in the 25% bracket would be losing a $4,050 personal exemption for each child after their first, which would result in $1,012 of additional tax due per child.  Unless the “new’ plan increases the child tax credit by an additional $1,012 (from $1,000 to $2,012), it won’t offset the losses incurred by a 25% taxpayer when combining the standard deduction and personal exemptions (discussed above).

The proposed framework eliminates all itemized deductions, but offers mysterious “tax incentives” for home mortgage interest and charitable contributions.  This is very vague, and may be a benefit if these “tax incentives” are credits, and in addition to the flat standard deduction (current law requires you to select one or the other).

Without specifics, it appears that the proposal will hurt taxpayers who live in high-tax states and itemize deductions.  As a California resident, I can currently deduct my (high) state income taxes paid, plus my (high) property taxes.  When I lived in Florida I didn’t benefit much from itemizing, so the loss of these deductions wouldn’t have hurt much, if at all.

There were several things in the framework which would be welcome changes.

First, the individual AMT needs to go, and this proposal would repeal it.  Kudos!  (Now make it happen!)

Second, the 25% maximum tax rate for small business income would benefit many sole proprietorships, partnerships, and most S-Corps.  Small business owners pay too many taxes, IMO.  Allow them to reinvest in themselves, and grow to become large businesses.

It does attempt to simplify things, and I like that.  Contrary to popular opinion, most tax professionals would love to see the code simplified, as it would simplify our jobs significantly!  This is a great start, but will require a *lot* of revision before it becomes anything more than a shell game.