Trump tax plan?

[bedraggled]

As best as I can determine, Trump will collapse the 28% and 33% brackets down to the 25% bracket. The new 25% bracket may apply to many of us here on the Forum. I imagine the 25% bracket, when implemented, would be beneficial.

How is my assessment?

[Maddy]

The Internal Revenue Code, to the best that I can recall, spans something like six shelves. Yet their idea of "simplification" always seems to amount to reducing the number of brackets.

[Mountaineer]

The Internal Revenue Code, to the best that I can recall, spans something like six shelves. Yet their idea of "simplification" always seems to amount to reducing the number of brackets.

Brackets that hold up the shelf?

[bedraggled]

So, will the 28% and 33% brackets disappear and fold into the 25% bracket?

Looking for opinions from this thoughtful group.

[sophie]

It depends on what happens with deductions. The big one of course is the state/local tax deduction. Blue state residents will get creamed, and the tax increase will more than offset the rate reduction for most people. Over 10% of my income goes to state/local income and property taxes. I realize that this deduction acts as an enabler for certain states to overspend, and that it probably is a good thing in the long term to take away the crutch - but there will be a lot of short term pain, and instead of tackling the causes of the overspending (pensions, early retirement for city workers, corruption, expensive welfare programs) people will spend their energy complaining about Trump.

I agree with Maddy. Tax simplification should mean reducing the complexity of rules for deductions, extra taxes etc. Reducing the number of brackets doesn't simplify anything, it will only change some numbers in the tax table. A big increase in the standard deduction will help for most people, but it still won't bring US taxes in line with, say, Canada's income tax system, where you can file your taxes on a postcard.

[Maddy]

So, will the 28% and 33% brackets disappear and fold into the 25% bracket?

Looking for opinions from this thoughtful group.

I presume we're still talking about marginal tax brackets, but who knows. If they're talking about a flat 25% tax assessed on both your first and last dollar of income, there could be some rude surprises.

[sophie]

Standard deduction according to the unofficial descriptions out there is supposed to increase to $25K/$50K, so presumably that will take care of the problem of losing the 10 & 15% tax brackets. It will also increase the number of people who don't owe taxes. Not a bad move.

It will also make it easier to get rid of the mortgage interest deduction eventually. It's already not helpful for people on the low end of the salary & home value scale, and an increased standard deduction with only two things you can deduct (mortgage interest & charitable contributions) means that you'd have to be a lot wealthier than pretty much anyone on this forum to itemize.

[Xan]

Doesn't that also amount to killing the charitable contribution deduction? Is that such a good thing?

[bedraggled]

Does anyone care to make a conjecture on the final form of the new tax plan?

[Tyler]

From what I understand reading early reports, they're proposing doubling the standard deduction while eliminating virtually every other deduction except for mortgage interest and charitable contributions. IMHO, that's a pretty legit simplification that I can totally get on board with.

Blue states will kick and scream about how losing the state tax deduction will harm them the most, but IMHO the tax code has disproportionately favored blue states for too long. They'll still be getting the benefit of the mortgage interest deduction that most people in normally-priced homes don't get, so I think that's a fair trade.

Overall, I like it.

[ochotona]

I don't like the effects on the public debt. These cuts won't pay for themselves. But they will save me thousands, if enacted.

[Desert]

From what I understand reading early reports, they're proposing doubling the standard deduction while eliminating virtually every other deduction except for mortgage interest and charitable contributions. IMHO, that's a pretty legit simplification that I can totally get on board with.

Blue states will kick and scream about how losing the state tax deduction will harm them the most, but IMHO the tax code has disproportionately favored blue states for too long. They'll still be getting the benefit of the mortgage interest deduction that most people in normally-priced homes don't get, so I think that's a fair trade.

Overall, I like it.

I haven't studied it yet, but if it turns out to be as you described it Tyler, I like it too. Unfortunately, the national debt will climb .... but I suppose that's inevitable with any presidency these days.

[Tyler]

The bill needs to be passed via reconciliation, which to qualify means it must be scored by the CBO as reducing deficits. So I'll be interested to see the final accounting -- it's a balancing act.

Sure, most people will be really happy with a higher standard deduction. But on the other side, eliminating the deduction for state taxes is a big deal and will generate lots of new federal income, and eliminating most itemized deductions will also help fight the most prolific tax dodgers. And as for corporate taxes, plan on the deal being structured in a way to plausibly increase overall government revenue by encouraging economic growth.

[Xan]

Why have a standard deduction at all? It seems that if the point is to raise the amount of income that's tax-free, the best way to do that is to make the "standard deduction" ADDITIVE with itemized deductions rather than instead of them.

Raising the standard deduction as it is just penalizes charitable people.

[Desert]

The standard deduction really is weird, isn't it. What a strange set of rules.

Tyler, I agree that the best defense is likely to be a story about increased economic activity driven by reduced corp taxes. It's not the worst tax idea, but corporations already avoid most corp taxes, paying about a third of the advertised rate. So it's mostly theater for the masses, I'm afraid.

[moda0306]

The standard deduction really is weird, isn't it. What a strange set of rules.

Tyler, I agree that the best defense is likely to be a story about increased economic activity driven by reduced corp taxes. It's not the worst tax idea, but corporations already avoid most corp taxes, paying about a third of the advertised rate. So it's mostly theater for the masses, I'm afraid.

I've come to find itemized deductions far "weirder" than the standard deduction. While we could probably debate the deductibility of charitable contributions for days, it's just a weird bunch of random ins and outs that give people an adjustment to their "taxable income," none of which seem to have much moral or economic legitimacy when compared to other expenses we incur (medical, other losses).

I find it extremely frustrating watching the tax policy proposals. I feel like the debate happens on a similar level to how a couple of 9 year old girls would reinact a tea party. Pardon the political quasi-pun.

[Desert]

The standard deduction really is weird, isn't it. What a strange set of rules.

Tyler, I agree that the best defense is likely to be a story about increased economic activity driven by reduced corp taxes. It's not the worst tax idea, but corporations already avoid most corp taxes, paying about a third of the advertised rate. So it's mostly theater for the masses, I'm afraid.

I've come to find itemized deductions far "weirder" than the standard deduction. While we could probably debate the deductibility of charitable contributions for days, it's just a weird bunch of random ins and outs that give people an adjustment to their "taxable income," none of which seem to have much moral or economic legitimacy when compared to other expenses we incur (medical, other losses).

I find it extremely frustrating watching the tax policy proposals. I feel like the debate happens on a similar level to how a couple of 9 year old girls would reinact a tea party. Pardon the political quasi-pun.

But why have a standard deduction at all? The brackets could simply be adjusted upwards a bit and we could delete several lines from the 1040.

I agree that the itemized deductions are also quite weird. Maybe all "deductions" should be eliminated.

[moda0306]

The standard deduction really is weird, isn't it. What a strange set of rules.

Tyler, I agree that the best defense is likely to be a story about increased economic activity driven by reduced corp taxes. It's not the worst tax idea, but corporations already avoid most corp taxes, paying about a third of the advertised rate. So it's mostly theater for the masses, I'm afraid.

I've come to find itemized deductions far "weirder" than the standard deduction. While we could probably debate the deductibility of charitable contributions for days, it's just a weird bunch of random ins and outs that give people an adjustment to their "taxable income," none of which seem to have much moral or economic legitimacy when compared to other expenses we incur (medical, other losses).

I find it extremely frustrating watching the tax policy proposals. I feel like the debate happens on a similar level to how a couple of 9 year old girls would reinact a tea party. Pardon the political quasi-pun.

But why have a standard deduction at all? The brackets could simply be adjusted upwards a bit and we could delete several lines from the 1040.

I agree that the itemized deductions are also quite weird. Maybe all "deductions" should be eliminated.

Standard deduction essentially exists as a "contributor to a 0% tax bracket," as does the exemptions and itemized deduction.

I don't consider that "weird." Almost every tax plan I've seen has an income level of what some sort of 0% tax bracket would be.

[Marlb10]

Don't you think keeping forums out of politics is a good idea?

I hate Trump though. Just saying.

[Xan]

Standard deduction essentially exists as a "contributor to a 0% tax bracket," as does the exemptions and itemized deduction.

I don't consider that "weird." Almost every tax plan I've seen has an income level of what some sort of 0% tax bracket would be.

Moda, I'm afraid I don't know what you mean by "contributor to a 0% tax bracket". Can you elaborate?

[moda0306]

Standard deduction essentially exists as a "contributor to a 0% tax bracket," as does the exemptions and itemized deduction.

I don't consider that "weird." Almost every tax plan I've seen has an income level of what some sort of 0% tax bracket would be.

Moda, I'm afraid I don't know what you mean by "contributor to a 0% tax bracket". Can you elaborate?

Theoretically, one could design a tax code with a 0% tax bracket, which would perhaps calculate on the first, say, $20,000 of income.

But it's just semantics.

If I have no "0% tax bracket," and instead have one that starts at 10% or 15%, but instead have a "standard deduction" of $15k and an "exemption deduction" of $5k, I've essentially accomplished the same thing.

So essentially both create a floor of income that must be reached before one owes any income tax. Call it a "Make America Great Again Deduction" if you want.

[Maddy]

The repeated reference to a 15 percent tax rate for "businesses" is puzzling. I assume this applies only to corporations?

What about deductions for businesses? The most essential function of a deduction, when it comes to businesses, is to ferret out what truly is "income." If somebody sells a widget for $100 but pays $60 for it and incurs another $35 in expenses to get it out the door (an increasingly troubling reality in today's economy), the gain is only $5. The long-established principle that only gains are taxable makes simplification a challenge, if not an impossibility.

[Xan]

Standard deduction essentially exists as a "contributor to a 0% tax bracket," as does the exemptions and itemized deduction.

I don't consider that "weird." Almost every tax plan I've seen has an income level of what some sort of 0% tax bracket would be.

Moda, I'm afraid I don't know what you mean by "contributor to a 0% tax bracket". Can you elaborate?

Theoretically, one could design a tax code with a 0% tax bracket, which would perhaps calculate on the first, say, $20,000 of income.

But it's just semantics.

If I have no "0% tax bracket," and instead have one that starts at 10% or 15%, but instead have a "standard deduction" of $15k and an "exemption deduction" of $5k, I've essentially accomplished the same thing.

So essentially both create a floor of income that must be reached before one owes any income tax. Call it a "Make America Great Again Deduction" if you want.

Oh okay. I agree with and understand that. But: why should that standard deduction be instead of, as opposed to in addition to, my itemized deductions?

[bedraggled]

1) Do we still get a personal exemptio on Form 1040?

2) Have the taxable income ranges been announced, so we know to which amounts the new brackets apply? I could not find anything.

[D1984]

1) Do we still get a personal exemption on Form 1040?

2) Have the taxable income ranges been announced, so we know to which amounts the new brackets apply? I could not find anything.

1. AFAIK, yes; personal exemptions will remain for taxpayers themselves....but NOT for dependents. The increased standard deduction is supposed to make up for this. However, for taxpayers with a stay-at-home spouse and several dependents, it will not fully make up for it and these taxpayers (many of whom are lower middle to upper middle class) will actually pay slightly higher taxes overall due to this; Lily Batchelder reports up to 25 million Americans could pay higher taxes due to this (and due to the elimination of deductions for state and local taxes).

2. Not yet.