How will tax reform change your tax bill?
Donald Trump and the Republican-led Congress have been touting tax reform for the past two years. They have said that our federal tax system is too complicated, taxes are too high, and that we need to reduce the tax burden for all Americans. However, a reduction in taxes may not be the case for everyone if the plan goes through as President Trump has laid out.
There are some big gaps in the plan that was released earlier this year, but the major changes for individual taxpayers include a reduced number of tax brackets from seven brackets to three; a reduction in the top tax rate from 39.6% to 35% under Trump’s plan; elimination of itemized deductions except for mortgage interest and charitable contributions; doubling of the standard deduction to $12,700 for single taxpayers and to $25,400 for married filing joint taxpayers; and elimination of personal exemptions, $4,050 per taxpayer, spouse, and dependents.
Let’s look at a simple example of a married couple with two children who live in California and own a home. Assume the couple has total gross income of $150,000 from wages, mortgage interest of $25,000 per year, charitable contributions of $1,000, property taxes of $5,000, and state taxes of $5,000. They would also have $16,200 in personal exemptions, further reducing their taxable income to $97,800. Under current law, the couple would owe federal tax of approximately $16,000. Under Trump’s plan, they would lose all itemized deductions except for mortgage and charitable contributions, and they would lose personal exemptions, leaving them with taxable income of $124,000. Under current tax law, the 25% tax bracket starts at approximately $75,000 of gross income. Assuming that’s the same under Trump’s plan, the couple’s tax could increase to approximately $19,000.
There is no telling what, if anything, will happen this year in regards to tax reform. However, you won’t know how the changes will affect your tax bill until you run the numbers.
For additional information contact Jon Huckabay, Tax Principal at 714.569.1000, [email protected] or visit us at dev.lslcpas.com.
By: Jon Huckabay, CPA, Tax Principal