Will Trump’s $5 Trillion in Tax Cuts Mean Anything for You?

Donald Trump

Who would benefit from Trump’s tax plan? | Win McNamee/Getty Images

Is there anyone out there who wouldn’t enjoy a tax break? If President Donald Trump gets his tax plan approved, the tax breaks will come — at least according to the president.

Trump is intent on authoring tax reform that will make the whole process simpler. But with millions of taxpayers and trillions of dollars in the mix, making things simpler is easier said than done.

Because only the basics of Trump’s tax plan have been made public, the finer details are open to speculation. Trump frames it as a tax cut that will put more money into the pockets of everyday Americans. But his concept of reality when it comes to money is a little bit skewed, so it’s hard to know whether what he says will hold true.

At least one thing seems to be certain: Tax reform is coming one way or another. It could arrive as proposed in the basic framework, or it could be something totally different once Congress hashes out the details.

Let’s take a look at one thing we don’t know, a few things we do know, and how Trump’s tax reform plan could affect you.

What we don’t know: How much it will really save taxpayers

Uncle Sam

It’s not clear how much Uncle Sam would take from Americans. | Spencer Platt/Getty Images

One thing no one can agree on is exactly how much the Trump tax plan would save taxpayers. A report by the Institute on Taxation and Economic Policy says the plan would lead to $4.8 trillion in cuts. Meanwhile, ABC News claims the plan calls for nearly $6 trillion in cuts. Given that the U.S. tax code is several thousand pages long, figuring out how every single taxpayer would be affected by Trump’s proposed plan is next to impossible.

Next: The basics on deductions and exemptions

The end of dependent exemptions?

Man doing taxes

You might have to relearn some things about deductions. | Getty Images

  • Old plan: Standard single and joint deductions with personal exemptions
  • Trump plan: Standard single and joint deductions with no personal exemptions

Under the existing plan, taxpayers can automatically subtract $6,350 (single filer) or $12,700 (married filers) from their tax bill. Taxpayers can then deduct $4,050 for each additional member of the household. A report by the Tax Foundation says the Trump plan would increase the standard deductions to $12,000 and $24,000 but do away with all personal exemptions.

What does that mean for you?

Just like doing taxes themselves, it’s complicated. Say you are a married couple with four children and a shared income of $40,000. The current standard deduction of $12,700 reduces your income to $27,300. Six personal exemptions at $4,050 each would further decrease taxable income to $3,000, taxed at the lowest rate of 10%. You pay $300 in taxes.

Under the Trump plan, that same family would take the standard deduction of $24,000, but that’s it. Without any personal exemptions, you’re on the hook for $16,000 in taxes. At 12%, you pay $1,920, or roughly $1,600 more. In this format, large families with low incomes stand to be punished more than wealthy large families or childless couples. However, the Tax Foundation notes the new plan would likely provide some sort of relief for couples with children, perhaps an expanded child tax credit. To what degree has yet to be determined.

Next: New brackets will be coming.

Changes in the tax brackets

income tax sign

The poorest in the country could see a tax increase. | Joe Raedle/Getty Images

  • Old plan: Seven brackets
  • Trump plan: Three brackets

The tax code as it stands encompasses seven brackets that tax income at rates of 10%, 15%, 25%, 28%, 33%, 35%, and 39.5%. Trump’s plan calls for only three brackets that would tax at 12%, 25%, and 35%. It looks as if the lowest-income earners could see taxes increase while the wealthy see a tax break, which goes against Trump’s claim that big earners, such as him, would not be getting bigger tax cuts with his plan.

Because the Trump plan is merely bare bones right now, two things are unknown. One, the level of income that decides which tax bracket you’re in has yet to be determined. Two, the plan calls for some increase in the standard deduction filers can claim.

What does that mean for you?

It depends. Writing for Forbes, CPA Tony Nitti puts it like this. If you make $25,000 per year, you are entitled to a $6,350 standard deduction plus a $4,050 personal exemption, lowering your taxable income by $10,400 to $14,600. Taxed at 10%, that’s a bill of $1,460. The same person under Trump’s plan will be able to take a $12,000 deduction, lowering taxable income to $13,000. But at 12%, that’s a bill of $1,560.

According to the Tax Policy Center, the number of taxpayers who itemize (go through every line of the tax worksheets in order to lower their taxes) will decrease by 27 million. The organization claims certain segments of the population will feel the brunt. “Repealing personal exemptions and the head of household filing status, however, would cause many large families and single parents to face tax increases,” the Tax Policy Center wrote.

Next: Other deductions get the ax.

Say goodbye to itemized deductions

IRS building

This shouldn’t affect most people. | Win McNamee/Getty Images

  • Old plan: Provides deductions for state and local taxes
  • Trump plan: Eliminates deductions for state and local taxes

If you were to file your taxes today and chose to itemize all deductions rather than claim standard deductions, you would be able to claim the greater of your income or sales tax and your property tax liabilities. You won’t have the choice if the Trump plan takes effect.

What does that mean for you?

On the surface, it seems like one of Trump’s sneaky ways to come out in the black financially. In reality, it would likely have very little impact on your tax return. According to the Tax Foundation, most of the money saved from such a deduction flows back into households making more than $100,000 per year. Even then, it’s taxpayers in high-tax states, such as California, Illinois, New Jersey, New York, Pennsylvania, and Texas, who end up benefiting the most.

While many itemized deductions would be eliminated under the Trump plan, mortgage interest and charitable giving deductions would survive.

Next: Big cuts at the corporate level

Big breaks for big business

Donald Trump

It could cost the average American in the long run. | Tasos Katopodis/Getty Images

  • Old plan: 35% tax rate for businesses
  • Trump plan: 20% tax rate for businesses

The existing code taxes big businesses at a 35% rate. As the Institute on Taxation and Economic Policy notes, however, corporations pay closer to 14% thanks to loopholes and other tax breaks.

Trump touts himself as a friend of his fellow businessmen and campaigned as the candidate who would keep jobs in the United States. This part of his tax plan seems to address this specifically. The thinking is if big businesses have more money in their coffers they will invest that capital in personnel, helping to increase jobs.

What does that mean for you?

In the short term, not much. Experts at Crowe Horwath, an accounting, consulting, and technology firm, say limiting certain deductions “likely will result in an effective tax rate in excess of 20 percent for businesses with significant debt.” The Institute on Taxation and Economic Policy claims making any change to corporate taxes is merely window dressing, noting several Fortune 500 companies paid little or no taxes from 2008 to 2015.

In the long term, this part of the plan could cost you a lot. The Tax Policy Center claimed the Trump plan would reduce federal receipts by $6.2 trillion between 2016 and 2026. About three-fourths of the revenue loss would come from business tax provisions. If government revenues drop by that much, you can bet Uncle Sam will try and find a way to make up the shortfall, and it could come out of your pocket.

Next: Be ready to move if you want a bigger break.

Where will you see biggest benefits?

Trump and Melania in Texas

States that have already been suffering would likely suffer more. | Jim Watson/AFP/Getty Images

If the Trump plan as outlined makes it through all the legislative hoops and is passed into law, some areas of the country would benefit more than others.

What does that mean for you?

In rough terms, a better deal depending on where you live. The Institute on Taxation and Economic Policy notes that 19 states plus Washington, D.C., would see tax cuts across all sectors higher than their shares of the U.S. population. Wyoming would be the big winner, receiving cuts 213% greater than its share of the population. Connecticut, North Dakota, Massachusetts, South Dakota, Florida, Washington, and Washington, D.C., all would receive cuts that are 125% or greater, relative to their share of the population.

Several of the states that stand to come out on the short end of the Trump plan are the ones that need it most: Mississippi, West Virginia, Arkansas, Kentucky, and Alabama rank in the bottom 10, according to the Institute on Taxation and Economic Policy.

Next: Lots of changes could be coming.

Stay tuned for more

Donald Trump

There could be cuts of services for those who need them most. | Joe Raedle/Getty Images

Trump has already shown he is very willing to spend tax dollars to maintain his lifestyle. Does he care about your lifestyle, though? That is highly unlikely. If his plan comes to fruition, expect massive changes to some basic services that benefit those who need the most help. As Nitti writes in Forbes, any tax plan needs to come out revenue neutral in the end, meaning taxes collected need to equal government expenditures. Because the Trump tax plan is just getting off the ground and the details are blurry at best, expect to have a clearer picture when the plan is closer to a finished product.

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