Recently, President Donald Trump released an overview of his proposal for sweeping tax reform. Among the key provisions are:
- A simplification of tax brackets – The Trump plan will reduce the number of tax brackets from seven to three, taxed at rates of 12 percent, 25 percent and 35 percent.
- Elimination of the estate tax – Estate taxes are currently applicable only to individual estates of more than $5.45 million, or married couples’ estates valued at $10.9 million or above. Still, cuts are proposed.
- Changes to personal exemptions and deductions – Only mortgage interest and charitable contribution deductions remain; all personal exemptions disappear, but the standard minimum deduction would double. This included deductions for medical expenses, student loan interest and child care.
- Elimination of the alternative minimum tax – This provision helps ensure that the wealthiest taxpayers can’t escape tax liability, but it is difficult to calculate in some cases.
- No credits allowed for state income taxes or property taxes paid – Though mortgage interest is allowable, property tax state income tax deductions will be cut; this could have huge financial implications for people living in the highest-taxed states (like California, New York, Massachusetts, Connecticut and New Jersey).
Some tax experts have cautioned against some of the proposed reforms for several reasons, in particular how they could negatively impact small businesses. Small businesses, particularly those that aren’t incorporated, might actually end up paying just as much or even more in taxes than they do currently if proposals are adopted.
Most small businesses (about two-thirds) currently pay “pass-through” taxes at a rate of about 15 percent instead of those at the corporate tax rate. Proposed changes would likely help mainly the largest corporations, not small business owners. A recent USA Today report reveals that the majority of small businesses would likely not see any benefit from the proposed changes, and might actually see their taxes go up as deductions and exemptions are lost.
Furthermore, companies offering “services” instead of tangible goods will not see a lower tax rate. They are exempt under the proposal, and would stay at the higher corporate tax rate regardless of size.
For now, these tax changes are all theoretical. In the meantime, you need to continue paying personal and business taxes as usual to avoid underpayment and to lower your chance of an investigation or audit.