I feel like we’ve been waiting forever for something tangible to come out of Trump’s presidency policy wise. We’ve had plenty of scandal, plenty of outright craziness but not much in the way of big ticket policy items, especially since his Healthcare plan fell apart repeatedly in Congress. Looks like Obama making Presidency look easy doesn’t quite make it so, right?
Anyhow, the Donald (technically the Republicans in Congress) finally released details of their tax plan and I took a little time out of my currently crazy schedule to peruse it a little. So here’s some of the proposals that stand out in the plan and my basic first impressions about it.
1. Corporate taxes
Trump’s plan wants to reduce the top corporate rate to 20% and for small businesses that pass their profits to owners it will be 25%. That compares to a current top rate of 35%.
Verdict: I love this. It will be good for stocks across the board, and will help new business formation at the margins because even though people say no one pays that top tax rate (which is true) it also costs a ton in lawyers, financial engineering and accountants to achieve a lower tax bill. So lowering it across the board by a full 15% will be great for business environment. Yay.
2. Fewer tax brackets
Currently, the US tax code has 7 tax brackets: 10,15,25,28,33,35, and 39.6 or basically 40% that they don’t want to call 40%. The current plan proposes reducing that to 4: 12,25,35 and 39.6 aka 40%. Originally the plan was to remove the 39.6% bracket entirely but the Democrats insisted on keeping it, but only people who make millions need to worry about that rate. To me, the impact of this proposal is a bit dubious. I’m not sure what incomes qualify you for each of these levels but if they keep it pretty similar to the existing income levels then it increases taxes somewhat for those in the former 10 and 33% brackets, lowers it signficantly for those formerly in the 15 and 28% range and then kind of keeps it the same for everyone else. It makes it easier to file, but it also makes it harder to shift incomes to bump your tax bracket up or down. So in totality, this one is a mixed bag and I’m not sure where I stand on it.
3. Standard Deduction
The standard deduction currently is $6,350 for singles and $12,700 for married couples. The new plan increases this significantly to $12,000 for singles and $24,000 for married couples. This is very very good for most income earners, especially middle class people like most of my readers because everyone typically gets it, as long as you made any money at all. The deductions don’t directly put money in your pocket unlike a credit but it lowers your tax bill so all things being equal, you’re going to be much happier filing your tax return if this Bill passes. I give this an unequivocal win.
4. Child tax credit
Credits do give money directly to you so people love them. Currently, IRS gives you $1,000 per child you claim as long as you make less than $110,000 as a family. There is no credit for any adults you support. The new proposal increases this to $1,600 per child, adds $300 per adult you support and increases the income limit to $230,000. This is awesome awesome awesome. I think this will be a fan favorite, and I can’t wait till tax season when the light goes up in the eyes of my clients when I tell them how much more money they will be getting. If this bill passes of course. This is another unequivocal win.
5. Estate Tax
This is one that most of you, except very very few, don’t really care much about because you’re too young to worry about estate taxes. You don’t have the assets (and neither do I tbh) cos we’re millennials and our chief concern is how to reheat our left over avocado toast. But I did some estate planning for a few clients this year and I can tell you that this is a huge concern. Right now, the tax code allows you to leave up to $5.5 m to your survivors untaxed if you set things up correctly, and that goes up to around $11 m if you leave it to your surviving spouse (although he or she then gets hammered if they eventually pass on). With smart estate planning and use of tax free gifting spread over years, you can technically pass close to $14 m over to your survivors under the current tax code if you do it well. Doing it well costs money though. The new plan increases the exemption from $5.5 to $11 million, and up to $22 million for surviving spouses which means you can transfer up to $25 million at the very least if you do things well, to your survivors. And furthermore, the plan entirely eliminates the estate tax after six years. This is great news for aspiring rich people like me, and if there’s any of my readers that already has assets at that level, get at me if this bill passes so this good news can change your life. This proposal is so sweet to me and it’s a huge deal if it passes. I love it. But Democrats and tax lobbyists are going to fight it to the end and they have a lot of good arguments as to why it shouldn’t pass so it’s likely this won’t see the light of day. But if it does, I will be sharing estate planning cards everywhere. Ask your millionaire mommies and daddies to call me.
6. Mortgage Interest Deduction
Under the current plan you can deduct interest payments on your mortgage up to $1 million of your mortgage. This bill reduces that to only interest paid on the first $500,000 of the mortgage. This leads to lower deductions which means more people will pay more taxes but at these income levels that sounds like a rich people problem so I don’t like it but I’m not losing sleep over it.
7. State/Local and Property Income Tax Deductions
Right now, you can deduct taxes you pay to your city and state from your federal income and not have to pay tax on that. The same goes for all property taxes you pay to your locality, you can deduct that from your taxable income at the federal level. The new proposal removes the state/local taxes exemption completely and caps the property tax deduction to $10,000 which I’m not sure if it’s $10,000 per property, or just $10,000 per person, across the board. This proposal is crap cos it will raise taxes for almost everyone, and if its $10,000 across the board rather than per property then for someone like me looking into real estate as an investor, it’s going to be a really sucky proposal. People that live in high tax states like New York, New Jersey and California are not going to like the fact that the high city, local and state taxes they pay will no longer be deductible and believe me they’re going to fight this. So I hope this one and #6 get enough push back to be struck out or amended. Right now? My verdict is: trash.
8. Personal Exemptions and Other Deductions
Most of the exemptions like tax prep, medical expense, personal, spouse and child care deductions are mostly eliminated. Even charitable deductions are limited. Overall, many of the ways people try to lower tax bills are either reduced or completely eliminated. Of course no one likes paying more in taxes and this is what this proposal achieves but at the same time, there is some necessity to close these loopholes due to how much they open up the system for abuse. So I’m said to see them go, but I don’t mind it so much. Verdict: it’s alright, I guess.
Overall, I like this plan. It does help businesses, rich people, middle class. It doesn’t help the poor as much as I’d like it to, and hopefully as its being debated, more proposals that also help the poorest would be put in place. I’ll also expect to see a lot of changes to more broadly help the middle class especially in states and localities with higher tax rates (which all tend to be Democrat though I’m not going to go as far as say that Republicans want to deliberately punish those voters although it’s not an impossible thing). Overall, I’m interested in seeing how the fight plays out in Congress and if they can succeed in passing it but count me as a supporter of this plan.
Let me hear what you think.