Tip: Looking Ahead to Tax Code Changes

During his campaign, President Trump took aim at the Tax Code, saying he intended to simplify income tax laws. There is little doubt that a tax code overhaul is on the horizon, but what is less clear is exactly what the President proposes to include in what he is calling the Middle Class Tax Relief and Simplification Act. He also has said he intends to make tax changes fairly quickly, which might be optimistic because the Tax Code is made up of many legally binding provisions and multiple revisions to earlier laws that would require new laws – each one reviewed and passed by both houses of Congress before the new Tax Code is ready for the President’s signature. Here are some of the key changes that tax experts expect to see. Bear in mind that these remain speculative until signed into law, and that none will affect tax returns due this April.

Income Tax Rate Cuts

The changes are expected to cut the highest rate from 39.6 percent to 33 percent and to raise the lowest from 10 percent to 12 percent. It is expected that the number of tax brackets will decrease from the current seven to three. The President and the House seem to be in agreement on this approach. The Senate has not yet provided input.

Capital Gains Tax Rates

Currently, the President has not called for changes to the tax rates on long-term capital gains (currently 20 percent for the highest earnings brackets – single filers with adjusted gross incomes above $415,050 or couples with incomes above $466,950). Congress has indicated it would like to lower capital gains taxes.

Head of Household Filings

President Trump’s proposals call for the elimination of the head-of-household filing category. This means that some unmarried filers who currently claim dependents would no longer be able to claim more favorable rates than people who file as single taxpayers.

Caps on Itemized Deductions

The President has proposed capping itemized deductions (which are subtracted from taxable income and therefore reduce the taxes owed) at $200,000 for married couples filing jointly and at $100,000 for single tax filers. Under the Trump proposals, the standard deduction rates would be raised, which would mean many taxpayers who filed itemized returns in the past would no longer find it advantageous to do so.

The Repeal of the Alternative Minimum Tax

The AMT, which limits some deductions for the higher income brackets and results in taxpayers getting higher tax bills, would be repealed.

More Liberal Dependent Care Deductions

More liberal tax credits for care of children and older adults would be a feature of the new Trump proposals and would be available to taxpayers whether they itemize or not.  Individuals with adjusted gross income of more than $250,000 or couples filing jointly with income of more than $500,000 would not be eligible for these deductions. Tax credits are more valuable than tax deductions because they are subtracted from the tax that is owed and not from the income on which the tax rate is based.

In addition to the proposed changes to deductions and tax rates, repeal of the Affordable Care Act, which was a major part of the President’s campaign rhetoric, also will have some impact on the take-home pay of many wage earners in the United States.