Whatever your stance on our new president, he's certainly promised to shake things up. One of his major points on the campaign trail was an overhaul of the tax code. What will this look like for individual taxpayers?
1.) Nothing this year
If you're hoping to see changes to your tax burden this year, don't hold your breath. The taxes you're required to file before April are for 2016. That means the rules and regulations that govern them are already established. It's possible there may be some clarifications and minor modifications at the periphery of the tax code issued this year, but the bulk of the tax law for your upcoming return is pretty well set.
This includes the individual mandate of the Affordable Care Act (ACA). You will need to provide documentation of your health insurance for all 12 months of 2016, unless you're otherwise exempt from the mandate. Regardless of what the future holds for the ACA, it's the law of the land for 2016.
One of the issues to keep an eye on is the extension of tax deductions for mortgage insurance premiums. They were tax deductible for 2015, but Congress has not yet renewed the break for 2016. If you pay mortgage insurance, it's worth keeping an eye on what could be a significant change to your taxes.
2.) Simplified brackets for 2017
The tax code works by establishing a percentage of each threshold of money to be taxed. So, if you make $20,000 a year as a single person, under the current tax plan the first $9,750 is taxed at 10%, then the remaining $10,250 is taxed at 15%. Of course, thanks to deductions, it's slightly more complicated than that, but this is how the system works at its core. Trump plans to keep the basis of this system in place, but make significant revisions to it.
One of the pillars of the Trump tax plan is a reduction in the number of tax brackets. Under the current tax code, there are seven different tax rates for different income levels. Under the proposed Trump policy, there will be only three. For both couples and individuals with incomes over $415,000, this will reflect a significant reduction in their tax burden.
To make up for this loss of revenue, two brackets will see an increase. The first $9,750 ($18,550 for married couples) will be taxed at 12% instead of 10%, and amounts between $112,500 and $190,150 ($225,000 and $231,450 for married couples) will be taxed at 33% instead of 28%. This may result in a higher tax liability for middle-income Americans.
3.) Deduction changes
To make up for this greater tax liability, the Trump plan makes significant changes to the way deductions work. For starters, the standard deduction, the one most people take, will increase to $15,000 for individuals and $30,000 for couples filing jointly. That means that, for most people, the first $15,000 you earn will be tax-free.
For those who itemize their deductions, life gets a little more complicated. First, deductions are capped at $100,000, which may be a blow to small business owners with lots of deductible business expenses. Second, deductions will phase out for high income earners. If your income is over $261,000 as an individual ($313,800 for couples), you'll only be allowed to deduct a percentage of your itemized deductions from your income.
There's also no more "head of household" filing status, so individuals with more than two dependents will need to reconsider their filing status. Couples with more than two children will no longer be able to claim exemptions for them, but will be able to deduct a greater portion of their child care expenses from their income.
There are other parts of the Trump plan, including a repeal of the estate tax and an end to the so-called marriage penalty that affects high-income married couples. Of course, all of these changes will have to pass Congress before they take effect, and Speaker of the House Paul Ryan has other ideas about how to reform the tax code. It's likely that some, but not all, of these changes will be made for 2017, as the democratic process forces leaders to compromise for the greater good. Keep an eye on the goings-on in Washington as you file your taxes this year!
Your Turn: Be king for a day. What changes do you want to see happen in the tax code? Let us know how to fix the system in the comments, and check out what other people are saying!