- By Tina Orem
Part of the Election 2016 Special Report
(This article previously appeared on NerdWallet.com.)
President-elect Donald Trump proposed big changes to the U.S. tax system during his successful run for the White House. Whether and how your taxes will change, however, are uncertain, since the president doesn’t have the power to set tax policy or change tax rates. The Constitution gives that power to Congress.
If Congress were to back Trump’s campaign tax proposals, though, the changes would affect virtually all taxpayers in some way, especially high-income households and people with children. The impact of each proposal would depend on your individual tax situation. The specifics:
Couples filing jointly and making less than $311,300 could lose the personal exemption, though a shift to a lower tax bracket may make up for the loss.
Income Tax Proposals
Collapse the current seven income tax brackets to three:
Cap itemized deductions at $200,000 for married couples filing jointly ($100,000 for single filers)
Eliminate personal exemptions The personal exemption in 2016 is $4,050; it starts phasing out after the taxpayer’s adjusted gross income hits $259,400 ($311,300 for married couples filing jointly) and phases out completely at $381,900 ($433,800 for married couples filing jointly).
Eliminate the Alternative Minimum Tax (AMT) The AMT is an alternative method of calculating federal income tax that runs parallel to the ordinary method. Currently, the taxpayer has to calculate the tax liability under both methods and pay whichever amount is higher.
Eliminate head-of-household filing status This filing status typically is for unmarried people who pay more than half the cost to keep up a home for the year and provide most or all the support for at least one other person for more than half the year. This filing status often yields bigger deductions and more leeway on exemptions than just for single filing status. For example, the standard deduction for single status is $6,300 in 2016, but it’s $9,300 for head-of-household filers.
Bottom line: Many filers, particularly upper-income people, would move to a lower tax bracket. But some would be pushed into a higher bracket, as the table shows.
Also, the decision to itemize or take the standard deduction could get less tricky for some people, and those with lots of itemized deductions could have to reckon with the proposed cap.
Single parents should keep an eye on the elimination of the head-of-household status. Couples filing jointly and making less than $311,300 could lose the personal exemption, though the overall shift to a lower tax bracket may (or may not) make up for the loss.
Child Care and Elder Care Proposals
Add a deduction for child care equal to the state average cost of child care for children under age 13. Married taxpayers filing jointly and with AGIs above $500,000 ($250,000 for single filers) would not be eligible. Families with stay-at-home parents or grandparents also would qualify. The deduction would apply to up to four children per taxpayer.
Add a 7.65 percent spending rebate on remaining child care expenses for low-income parents through the Earned Income Tax Credit, or EITC. Married taxpayers filing jointly and with adjusted gross income above $62,400 ($31,200 for singles) would not be eligible.
The rebate could be capped at 50 percent of the taxpayer’s payroll taxes based on the lower-earning parent in a two-earner household. The income ceiling adjusts for inflation.
Allow all taxpayers to make tax-deductible contributions of up to $2,000 into Dependent Care Savings Accounts Leftover funds could be used for education once the child turns 18. There could be a 50 percent federal match for contributions of up to $1,000 per year made from the taxpayer’s EITC.
Add a deduction for the cost of elder care of up to $5,000 per year. Married taxpayers filing jointly and with adjusted gross income above $500,000 ($250,000 for single taxpayers) would not be eligible. The cap adjusts for inflation.
Bottom line: Child care and caregiving expenses are a significant target in Trump’s tax plan. Families making $62,400 or less could get a boost from the child care rebate.
Other Tax Proposals
Repeal the estate tax, but capital gains above $10 million held until death could be taxed (small businesses and family farms would be exempt). The proposal would not allow people to donate appreciated assets to a private charity established by themselves or their relatives.
Repeal the Affordable Care Act (ACA) net investment income tax This is a 3.8 percent tax people must pay on the lesser of their net investment income or the amount by which their adjusted gross income exceeds $200,000 for singles or head of household, $125,000 for married filing separately or $250,000 for married filing jointly.
Bottom line: Most estates aren’t subject to the estate tax now, so the proposals likely would affect only people who expect to inherit more than $5.45 million. Couples with incomes above $250,000 could get a reprieve from the ACA tax.
The Big Takeaway
Trump’s tax wish list is long, but should you bank on every single part of it? You will have to wait and see. Changing the tax system is a job for Congress, after all, and running any proposal by 535 lawmakers for approval won’t be easy.