How the Trump tax plan will hit you

If President-elect Donald Trump's tax plan becomes law, the rules for individual taxpayers will change dramatically next year. Of course, the details could easily change, and it's an open question as to when any changes would take effect. But if they do, the effect will be dramatic. The biggest change with the Trump plan would be a reduction in the top tax bracket, from 39.6 percent to 33 percent — a 6.6-point cut.

What the Trump plan might mean to you depends on your income and your tax-planning strategies. We asked Certified Public Accountants Michael Velazquez, a principal in the Glendale, California, accounting firm Sadd Velazquez Higashi Shammaa, and Gregg Wind, partner in the Los Angeles CPA firm KTL, to explain the possible changes and tell us what, if anything, taxpayers can do now to prepare.

What it means to you

Velazquez, in an email interview, said some taxpayers' situations will remain unchanged. "For instance, if you are already at the 33-percent bracket, barring any other changes to underlying factors in calculation (i.e. phase outs, deductions, credits, AMT, etc.) you will pay the same tax under Trump plan as you do now."

RELATED: Tax breaks for people over 50:

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10 tax breaks for people over 50
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10 tax breaks for people over 50

If you don’t itemize your tax deductions, you can claim a larger standard deduction if you or your spouse is age 65 or older. The standard deduction amount for older taxpayers is $1,250 higher than the deduction for people under age 65. And if a retiree is unmarried and not a surviving spouse, the standard deduction is $1,550 higher than that of younger taxpayers.

People age 65 and older can earn a gross income of up to $11,900 ($23,200 for couples both age 65 and older) before they are required to file a tax return. That's $1,550 (or $1,250 per spouse) more than the tax-filing threshold for younger workers.
Property tax rules vary considerably by state and local jurisdiction. However, in some places people who are above a certain age and who also earn below a specific income level qualify for property or school tax deferrals or exemptions.
If you or your spouse is age 65 or older, you have a low income and you file using form 1040 or 1040A, you could be eligible to claim a tax credit. Retirees who qualify may be able to reduce their tax bill by taking the credit. Younger people who are retired and disabled might also qualify.
Workers age 50 and older can contribute an additional $1,000 to an IRA, or a total of $6,500 in 2017. A 50-year-old worker in the 25 percent tax bracket who maxes out his IRA would save $1,625 on his current tax bill, $250 more than the maximum possible tax break of $1,375 for a younger retirement saver in the same tax bracket.
The tax savings is even bigger for older workers with access to a 401(k) plan. Employees age 50 and older can defer paying income tax on $6,000 more than younger workers if they contribute that amount to a 401(k) plan, or a total of $24,000. An older worker in the 25 percent tax bracket who maxes out his 401(k) plan could save $6,000 on his current tax bill, $1,500 more than a younger worker in the same tax bracket could potentially save. Income tax won't be due on this money until it is withdrawn from the account.
Younger workers who raid their retirement accounts are hit with a 10 percent early withdrawal penalty unless the money is used for a couple of specific purposes. However, once you turn age 59 1/2, you can withdraw money from an IRA for any reason without incurring the 10 percent tax. And if you leave your job at age 55 or later, you can begin penalty-free 401(k) distributions from the account associated with the job you most recently left at that time. However, income tax will be due on withdrawals from traditional retirement accounts at any age.
After age 70 1/2, you are typically required to withdraw money from your traditional retirement accounts and pay the resulting income tax bill. However, if you don't need the money, there is one way to avoid income tax on withdrawals from traditional retirement accounts. Retirees ages 70 1/2 and older who transfer any amount up to $100,000 directly from their IRA to a qualified charity will not owe income tax on the contribution.
Workers with high-deductible health plans can claim a tax deduction on contributions to a health savings account. Distributions from these accounts are tax-free when used to pay for qualifying medical expenses. Individuals who are age 55 or older by the end of the tax year are eligible to contribute up to $4,400 to a health savings account, $1,000 more than their younger counterparts.
The Tax Counseling for the Elderly program provides free tax assistance to those age 60 or older. IRS-certified volunteers assist older taxpayers with basic tax return preparation and electronic filing between Jan. 1 and April 15 each year.
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Generally, the Trump plan would reduce taxes. If you are in the 35-percent bracket or a 39.6-percent bracket today, your taxes would drop under the Trump tax plan.

But not everyone would pay less. A few in the middle-income range would pay a higher rate.

According to the Tax Foundation, a right-leaning tax policy research organization:

  • Despite increased taxes for some taxpayers, the Trump plan would reduce taxes, on average, leaving at least 0.8 percent more after-tax income in every taxpayer quintile.
  • Higher-income taxpayers would benefit most: The Trump plan would raise incomes for the top 1 percent of taxpayers by 10.2 percent to 16.0 percent.

In addition, Trump has proposed cutting the corporate tax rate, the capital gains tax and the rate on so-called "pass-through businesses."

He also wants to eliminate the estate tax. According to National Public Radio:

Only the wealthiest taxpayers — less than 1 percent — now pay that tax. Ending it would lead to an even greater concentration of wealth in the U.S.

Fewer tax brackets

One of the biggest potential changes for taxpayers would be Trump's proposal to consolidate tax brackets. Instead of the current seven tax rates, there would be only three: 12 percent, 25 percent and 33 percent:

Income Tax Brackets Under the Trump Plan*
Ordinary RateCapital Gains RateSingle FilersMarried Joint Filers
12%0%$0 to $37,500$0 to $75,000
25%15%$37,500 to $112,500$75,000 to $225,000
33%20%$112,500+$225,000+

*Courtesy of The Tax Foundation. Amounts are taxable income.

If you are wondering how you'd be affected by the Trump tax plan, use this personal tax calculator from the Tax Foundation to find out.

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Bigger federal deficit

Paying for these tax reductions will be costly. Revenue available to operate federal programs would shrink by between $4.4 trillion and $5.9 trillion over 10 years, the Tax Foundation says.

Trump has said he plans to cut spending by $1.2 trillion in the next decade. But, as noted above, he plans to cut revenue by even more. If nothing else is done to address the shortfall, the national debt will grow by roughly $5.3 trillion (105 percent) by 2026, according to an estimate by the nonpartisan Committee for a Responsible Federal Budget.

Rates would rise for some

For two groups of taxpayers, rates would rise:

  • Those now in the upper half of the 28-percent bracket would be pushed into the 33-percent tax bracket.
  • Those now at the very lowest end, in the 10-percent bracket, would face an increase, to 12 percent.

In a phone interview, Wind offered examples of how middle-income taxpayers might pay more:

  • A single person now paying 28 percent tax on income up to $190,000 would, under the Trump plan, pay 33 percent on earnings over $112,500 — about $3,500 more than today.
  • Married couples now paying 28 percent on income between $151,900 and $231,450 would, under the Trump plan, pay 33 percent on about $8,000 of that income — an extra $400 out of pocket.

But Velazquez and Wind emphasize that it's all speculation at this point. "We don't know what the limitations, phase-outs, credits and back door taxes will accompany all of this until it actually passes law," Velazquez says. "Take-home pay should increase (from the economic stimulation of tax cuts) but also the federal deficit would grow, which will make a lot of people nervous."

Deductions

President-elect Trump proposes leaving itemized deductions in place but cappingthe deductions you can claim at $100,000 for individuals and $200,000 for married couples. He wants to raise the standard deduction to $30,000, instead of the current $12,600 for couples and allow $15,000 for single payers.

Trump also would let families, including stay-at-home parents, fully deduct the cost of child care for children under 13.

Strategies

What, if anything, can you do to position yourself for the possibility that these changes could take place? Tax advisers are discussing with their clients strategies that could help position them to save on tax bills in case the Trump proposal becomes law. Wind, while emphasizing the uncertainty of any changes, says, "My colleagues and I all agree it is prudent to look at the possibility that some of these proposals could pass."

Wind outlined a few possible strategies, with the caveat that they are mostly useful for higher-earning taxpayers. Remember, though: these are only proposals. "Some of them may never become law," Wind says. "It is very tricky to advise. I think you can (only) make people aware of the possibilities."

  1. Defer income. If you are in one of the higher tax brackets and you could enjoy a lower tax rate if the Trump plan succeeds, try to postpone receiving some income until next year. Here's why: For 2016, for single people with taxable income over $415,050 and married people with taxable income over $466,950, deferring income could save a lot of money because income over those amounts are taxed at the highest rate, which currently is 39.6 percent. Under the Trump proposal that highest tax rate would be 33 percent. Delaying income until after Jan.1 potentially could save a single person with $415,000 worth of income about $24,000 (and a married couple with $466,950 in income could potentially save $28,017). Tactics for deferring income could include delaying invoicing, deferring a year-end bonus to 2017 and delaying closing the sale of a business until the new year.
  2. Accelerate income. You could take the opposite approach if you think your rate might increase. For example, if you are in the 28-percent bracket and think you could be pushed into the 33-percent rate under a Trump plan, you'd try to take all the income possible in 2016, in order to pay taxes at your current rate. A married couple earning about $160,000 to $200,000 together might be among those caught in this bind, Wind says.
  3. Take deductions. If you itemize deductions, claim all you legally can for 2016 since deductions next year could be much less generous. A tax proposal by the House Republicans would go even further than Trump's, allowing itemized deductions only for mortgage interest and charitable donations, points out tax expert Michael Kitces.
  4. Give to charity. Trump's proposed limit on deductions would affect about 329,000 taxpayers who take some $119 billion in itemized deductions, shrinking their possible deductions to about $45 billion, estimates the conservative American Enterprise Institute. This would "likely have a substantial negative impact on charitable giving," AEI says. The House Republicans want to leave the charitable deduction in place, but many wealthy donors are taking no chances and making larger-than-usual donations before the end of the year.

How do you think you'll be affected by Trump's policies? Share with us in comments below or on our Facebook page.

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