President Trump announced very significant reductions in business tax rates and serious changes to the individual tax. With the proposal explained on April 26 the President expects to speed up economic growth. The plan offers a 15% tax rate for all businesses, lower individual rates, a bigger standard deduction to benefit middle-income households and the repeal of the estate and alternative minimum taxes.
There new White House tax differentiate in some ways from the proposals made by the Republicans in the Congress and very much alienated Democrats. This means that the tax reform has narrow path to adoption in the Congress.
The tax-cut proposal is largely based on promises that Mr. Trump made during the presidential campaign, but it also presents some changes. One of those is a repeal of the provision in the tax code that allows individuals to deduct the state and local taxes they pay from their reportable income. According to The Wall Street Journal’s tax policy reporter Richard Rubin that “will hurt residents of high-tax states such as Mr. Trump’s home state of New York, New Jersey and California, and is already spurring objections from Republican lawmakers in those largely Democratic states”.
It is expected that this step would allow IRS to collect more than $1 trillion within the next 10 years, something that will help the budget find alternative funding to to pay for the business and individual tax rate reduction. This repeal is also expect to help to get the tax plan through the both chambers of the Congress, as they are focused on deficits in part because of budget rules.
What are the numbers for Individual Taxes?
The current seven tax brackets in the tax law will be reduced to three – 10%, 25% and 35%. Today’s rates are 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. As part of the tax reduction plan, the top rate will drop from 39.6% to to 35%. However, the Trump administration is still expected to explain which income ranges would apply to those brackets.
The standard deduction, which is currently $6,350 for singles and $12,700 for married couples, would double. It is expected that many low to moderate income families would pay no taxes. At the same time all other deductions (except for mortgage interest and charitable contributions) are expected to be removed from the tax code, including state and local taxes and medical expenses.
About 70% of Americans who have low or moderate income take the standard deduction. Many of the remaining 30% who itemize, largely higher income households are very likely switch to the standard deduction, leaving only about 5% itemizing.
The Business Tax Reduction
On the business side of the tax rates Trump wants to slash the top rate for all businesses to 15%. This is was campaign proposal. This is a significant reduction of the 35% that companies used to pay. The real top rate they have actually paid has always been lower due to the tax breaks.
The proposed drop to 15% is also a sharp decrease from the 39.6% top tax rate currently paid by owners and shareholders of the pass-through businesses who report profits on their personal tax returns.
The administration also plans one-time tax on the $2.6 trillion overseas profits made by U.S. multinational corporations. These money have never been brought back to the United States. Now American companies must pay tax on any profits they make, regardless of where in the world those are earned. Republicans want to switch to a territorial tax system for businesses, which mean that U.S. companies will only owe tax the the government on what they earn in the United States.
Removal Of Estate Tax
The estate tax, popular as “death tax” is expected to be removed. This 40% tax currently applies to $5.5 million or more inheritance for individuals and an $11 million or more inheritance for married couples.
Getting Rid Ot the Alternative Minimum Tax
The alternative minimum tax, a contribution to IRS, which affects households with incomes of at least several hundred thousand dollars is also expected to be repealed. The current rate is 28% for income that qualifies, and it affects individuals who would benefit from a the lower effective tax rate because of deductions.
It is also expected that the 3.8% tax on the interest, dividends and capital gains of higher income households would be also removed.