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Trump’s tax reform: An overview

UPDATED: Fri., Oct. 20, 2017, 5:06 p.m.

Tax brackets, deductions shift change under Trump tax plan. (Chris Soprych / The Spokesman-Review)
Tax brackets, deductions shift change under Trump tax plan. (Chris Soprych / The Spokesman-Review)

Editor’s note: This story has been changed from its original publication with an updated and corrected graphic and tax calculator.

Republicans have set their legislative sights on an ambitious tax reform agenda they say will simplify the tax code while providing a break for middle-class families.

Many details are yet to be determined, but here’s an overview of what the plan looks like.

Fewer tax brackets

The president’s plan would consolidate the existing seven tax brackets into just three, lowering the tax rate for the wealthiest Americans while raising it slightly for people at the bottom of the scale.

Republicans have said those changes would be offset by nearly doubling standard deductions, which are mostly taken by low- and middle-income taxpayers, while removing other types of deductions from the tax code so those in the higher-income bracket would owe taxes on more of their income.

Trump’s nine-page outline of the plan didn’t include the income brackets each rate would be applied to, but it likely would be close to a similar three-bracket plan introduced by House Republicans last year.

Under that plan, income under $37,950 for a single filer or $75,300 for a married couple would be taxed at 12 percent, versus a current bottom rate of 10 percent for income under $9,325 for singles and $18,651 for married couples.

Trump’s middle bracket, for income between $37,950 and $190,650 for singles and $75,300 and $231,450 married filing jointly, would be taxed at 18 percent. High-income earners above those thresholds would have a top rate of 35 percent.

That’s a significant discount for the wealthiest taxpayers, who are currently taxed 39.6 percent on income above $418,401 for an individual or $470,701 for a couple.

The outline says a fourth bracket for high-income earners may be created but did not specify a rate.

No more exemptions, but higher standard deductions

The plan also calls for simplifying the tax code by eliminating many of the deductions and exemptions that currently exist.

An exemption is a standard amount taken off a taxpayer’s taxable income for themselves, as well as any of their dependents. Single people can typically deduct $4,050 off their taxable income for themselves, and another $4,050 for each dependent.

Trump’s plan would eliminate those exemptions entirely, instead nearly doubling standard deductions, which also reduce taxable income.

Taxpayers have an option to itemize deductions or take a standard deduction from their taxable income at a rate set by the IRS. For 2017, the standard deduction for individuals will be $6,350, or $12,700 for a married couple.

The reform would nearly double the standard deduction to $12,000 for a single person or $24,000 for a married couple. About 70 percent of taxpayers take the standard deduction rather than itemizing, according to the Tax Policy Institute.

Republicans have billed the doubling as a “zero tax bracket,” and say it would offset the slight increase in the bottom tax rate from 10 percent to 12 percent.

The change could hurt families with many children, since married couples will be limited to a new $24,000 deduction, rather than receiving an additional exemption of $4,050 per child. Trump’s plan said it will increase the Child Tax Credit to offset this, but did not specify by how much. The plan also promised additional middle-class tax relief.

People with higher incomes typically itemize deductions, while people with middle and lower incomes often take the standard deduction. A Washington Post analysis of 2015 tax returns found breaks for state and local taxes, which the Trump plan would eliminate, overwhelmingly benefit rich taxpayers. So did deductions for mortgage interest and charitable giving, which the plan would keep.

Many details of the plan, including what would happen to the Earned Income Tax Credit and other credits commonly used by working-class families, are not yet clear.


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