Trump’s tax plan is out, and I’m here to explain everything to you in the best way I know how!
We’ll discuss how “The Unified Tax Reform Framework” will impact the average American and the not so average American by using cartoon characters from my childhood. Sit back, relax, and enjoy.
Spongebob: Increased Standard Deduction
Spongebob, everyone’s favorite sponge, would get a small boost from Trump’s tax plan. This would come in the form of an increased standard deduction and the elimination of the personal exemption. For 2017, the standard deduction is expected to be $6,350 and the personal exemption is expected to remain at $4,050. Combined, this is a total deduction of $10,400. Under Trump’s plan, the standard deduction will be $12,000 for single filers so this means someone like Spongebob would get to deduct an additional $1,600 from their income.
The increased standard deduction would save this lovable sponge about $400 in taxes.
Professor Utonium: Elimination of the Dependency Exemption
Everyone’s favorite single parent and father to three superhero daughters would be expected to pay more under Trump’s plan. With the elimination of the dependency exemption, Professor Utonium would lose out on $12,150 in deductions (3 dependent exemptions of $4,050 a piece).
The elimination of the dependency exemption would cost Professor Utonium over $3,000 in taxes.
Since he is not married, he only gets to take the increased standard deduction of $12,000 and would lose out on all those dependency exceptions. He most likely wouldn’t be able to claim the child tax credit since he probably makes over $75,000 as a professor and files as head of household.
Amazing World of Gumball: Elimination of Itemized Deductions
Homeowners have the most to lose under Trump’s plan through the elimination of the deductibility of real estate taxes and state and local taxes. The only itemized deduction available to homeowners is the deduction for mortgage interest, but it will be almost impossible to claim.
Here’s why – taxpayers can either chose to take the standard deduction or itemize their deductions. The only two itemized deductions that will remain will be the charitable deduction and the mortgage interest deduction. This means that a married couple will have to pay more than $24,000 a year in mortgage interest and charitable givings.
So let’s look at The Amazing World of Gumball as an example. Under the current system, they can deduct their state and local taxes, their real estate taxes, their mortgage interest and their charitable deductions. Let’s assume all this adds up to $24,000 in itemized deductions. Under Trump’s plan, they would break even because the standard deduction would be increased to $24,000 for married couples. But they would lose four personal exemptions at $4,050 a piece.
This family of four with more than $24,000 in itemized deductions would be expected to pay over $4,000 more in taxes each year.
Scrooge McDuck: Tax Breaks for the Rich
Scrooge McDuck would have the most to gain under Trump’s tax plan, which would save him millions of dollars each year (if not billions over the next decade). Here are just a few tax breaks that would be given to this billionaire duck whose net worth is estimated at $65.4 billion dollars, according to Forbes.
- Corporate tax rate cut from 35% to 20%
- Top tax rate cut from 39.6% to 35%
- Capital gains rate capped at 20%
- Elimination of the Estate Tax
- Elimination of the Alternative Minimum Tax (AMT)
- 25% maximum tax for flow through entities
The majority of the tax breaks will go to the top 1% of earners and would favor business owners over middle class workers.
The biggest windfall comes from the 25% maximum tax rate for flow through entities. Lets say you’re a successful business owner with multiple businesses and have a combined income of $10 million for the year. If you are taxed the 25% rate instead of the top tax rate of 39.6%, then you’ll save over $1.4 million in taxes.
It’s too early to know the specifics of how Trump’s tax plan will get passed by Congress (if it even will), but the winners and losers are clear from this proposal. The biggest losers are upper middle class families who own a home in states with high income tax rates and high property taxes. So, if you are a family of 4 living in and around New York with a household income of $200,000, then you have a lot to lose under this proposed tax plan.
If you are a wealthy business owner with several pass-through entities then you have the most to gain. If you are an upper-middle class family of 4 or more than you have the most to lose.
So the Republicans are keeping the Democrats’ top rate of personal income tax and drastically curtailing the state income tax and mortgage interest deductions! Republicans rightly call the Estate Tax the ‘Death Tax’, but they used to call the 39.6% individual income tax rate the ‘Hate Rate’. Now they are effectively raising individuals’ income tax rates.