President Trump has proposed a tax plan that promises to save taxpayers money over the next 20 years. By reducing the marginal tax rates at all income levels across America, the proposal aims to save $6.2 trillion in income tax over the first decade and $8.9 trillion in the second decade. However, with tax rates decreasing, the federal debt is projected to increase by at least $7.0 trillion over the first decade and by at least $20.7 trillion by 2036, according to the Tax Policy Center.
It’s important to note that no laws have been passed yet so these proposed changes have not taken effect—and there is nothing to say that they will go into effect. President Trump could change his mind at any given time and propose new tax laws. There is also nothing to say that he will get everything he wants in a tax plan once it is put in front of Congress.
It is important, though, to understand how these proposed plans will affect after-tax income if they do become law. A financial advisor can help plan, set expectations and make changes if needed. (For related reading, see: Will the Policy Uncertainty Index Doom the Trump Rally?)
Who Can Benefit the Most
There are currently seven different income tax brackets; there would be three under the proposed plan. The new plan would cut taxes at all income levels, although in terms of both dollars and percentages, high net worth households would benefit the most from the proposed changes.
High income taxpayers will see a reduction of $2,940 this year if the proposed changes tax effect. This would increase their after-tax income by 4.1%. Essentially higher after-tax income equals more spending, which is, in theory, good for the American economy or more individual savings. This is good for your personal bottom line.
Who Might See Taxes Increase
Although the proposal aims to cut taxes at all income levels, some Americans will actually receive fewer deductions and see their personal income taxes go up. The main cause is the elimination of personal exemptions. Under the proposed changes, married couples will see an increase in the standard deduction from $12,600 to $30,000. However, additional exemptions for children are being eliminated. Therefore, married couples with children will most likely not benefit from Trump’s new tax plans.
Single parents will be the biggest loser with Trump’s new tax plans. The head-of-household filing status is also being eliminated under the new plan. Americans with children earning between $20,000 and $50,000 annually will see their personal income taxes increase. Why? Because under the proposed law, deductions are changing from individual personal deductions and deductions for individual children to a flat rate deduction—which is less than the total of the combined individual deductions.
How Financial Advisors Can Help
Although the new tax plans are only a proposal at this point, the changes can be implemented at any time. It’s important to talk to your financial advisor about how the changes will affect your after-tax income, your expenses and the amount of income taxes paid at the end of the year.
If you are lucky enough to be part of the group who will benefit from Trump’s new tax plan, you can start saving more for short-term goals, your children’s education and retirement. If you don’t stand to benefit, it is important to start planning for the increase in your annual tax bill.
Lastly, Trump’s new tax plans give more tax options to businesses. If you’re a business owner, talk to your financial adviser about how the proposed tax plans will affect your bookkeeping. The sooner you start planning, the smaller impact the new tax changes will have on your day-to-day operations—if and when they are implemented. (For related reading, see: Trump Budget Funds Pentagon With Cuts to Health, Aid.)