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(Dow Jones) — The Trump administration on Wednesday proposed a tax overhaul that aims to simplify the system for individuals and households, but would cut some popular deductions that could cost some taxpayers — particularly those in high-tax states.
The proposals, which largely keep with those President Donald Trump made on the campaign trail, focused on two overarching goals for individuals: tax relief for families, particularly middle-income households, and simplification of the code.
The Northern Ag Network's Russell Nemetz talked with WipFli certified public accountant Curt Barnekoff in Havre, MT about the President's tax plan and whether its good or bad for Agriculture and Rural America.
Here are several of the takeaways:
Tax brackets
Mr. Trump called for cutting the number of tax brackets to three from seven, proposing rates of 10{43a21437b022293ea22983a65937d7e18883fb2ff2b11e03a1041d36bd400603}, 25{43a21437b022293ea22983a65937d7e18883fb2ff2b11e03a1041d36bd400603} and a top rate of 35{43a21437b022293ea22983a65937d7e18883fb2ff2b11e03a1041d36bd400603}, which is below today's top rate of 39.6{43a21437b022293ea22983a65937d7e18883fb2ff2b11e03a1041d36bd400603}.
That new top rate wouldn't apply to pass-through income, which a business entity passes on to its owners; that rate would be 15{43a21437b022293ea22983a65937d7e18883fb2ff2b11e03a1041d36bd400603}.
The White House didn't say what the income thresholds for these rates would be.
Standard deduction
As part of the simplified brackets, Mr. Trump has also proposed doubling the standard deduction for individuals. That change would increase the deduction from the 2016 levels of $6,300 for single filers and $12,600 for married couples filing jointly.
Doubling the deduction would greatly increase the number of people who take the standard deduction, says William Reichenstein, an investment professor at Baylor University.
But the plan is silent on personal exemptions, which were $4,050 for 2016. Repealing those, a part of Mr. Trump's campaign-trail plan, would remove much or all of the benefit of the higher standard deduction for households.
Other deductions
Under the plan, deductions for mortgage interest and charitable contributions would be protected. The two deductions are among the most popular for individual U.S. taxpayers, making them two of the most costly for the federal government.
But the proposal aims to cut other individual deductions, including a commonly used provision that allows state and local taxes to be deducted from reportable income.
That would be a large tax hit for some of those “who live in high-tax states, such as California, Illinois, Massachusetts and New York,” says Robert Willens, an independent tax expert.
Estate tax
Under current law, for 2017, the estate and gift-tax exemption is $5.49 million per individual, up from $5.45 million in 2016. Meaning: an individual can leave $5.49 million to heirs and pay no federal estate or gift tax.
Mr. Trump would repeal the estate tax entirely under his plan.
Jeffrey Levine, chief retirement strategist at Ed Slott & Co., isn't surprised about the White House's plan to repeal the estate tax, because Mr. Trump repeatedly vowed on the campaign trail to repeal it. “Anything less than a full repeal would have been surprising,” he says.
The alternative minimum tax
This complex tax, which was created to keep wealthy taxpayers from using loopholes to avoid paying taxes or greatly reducing their burden, would be repealed under the plan and would amount to a big simplification.
The tax has long been contentious as it wasn't indexed to inflation before 2013 and affected an increasing number of households each year as workers' incomes adjusted to inflation and surpassed AMT eligibility levels.
Child care
The White House didn't share new details on tax relief for parents, though published reports have indicated he would amend the plans he promoted on the campaign trail.
Under the tax code currently, parents can claim each dependent on their taxes, subject to certain income phaseouts.
Contributions to 401(k)s
Wednesday's proposal included no mention of a reduction in benefits for contributing to 401(k) and similar retirement plans, despite the possibility that adjustments to the pretax benefits of such plans would be on the table.
Source: Dow Jones
