WASHINGTON (AP) — President Donald Trump’s plan to overhaul the nation’s tax code could provide significant tax cuts for the working-class voters who elected him, but the unknowns could end up hurting many of these core supporters of the president.
A look at how Trump’s tax plan could affect families at different income levels:
THE WORKING CLASS
Most Read Business Stories
- House-rich, savings-poor and eyeing retirement, Bellevue couple ponders options | Money Makeover
- GE's fall illuminates bigger problems facing the American economy | Jon Talton
- Firefox is back, and it’s time to give it a try | Tech Review
- These places will pay U.S. workers thousands of dollars to move there
- Amazon employees demand company cut ties with ICE
These are the people who have been left behind by an increasingly globalized economy.
Trump’s proposal, a one-page outline short on detail, says he would double the standard tax deduction, which could provide significant relief to working-class families. But Trump’s top economic adviser used some bad math to describe the proposal, raising questions.
Gary Cohn said the standard deduction for a married couple would be doubled to $24,000. But that’s not double. The standard deduction for a married couple is $12,700, so double would be $25,400.
Cohn said the deduction would create “a zero tax-rate for the first $24,000.”
That sounds great, but very few families making $24,000 a year pay federal income tax, said Roberton Williams, a fellow at the nonpartisan Tax Policy Center. In fact, 44 percent of all U.S. households pay no federal income tax, though most pay other taxes.
Trump’s one-page sketch is silent on whether the tax code would still include the personal tax exemption, which allows most families to exempt $4,050 in income for each spouse and dependent child. In big families, this tax exemption can add up.
During the campaign, Trump released a tax proposal that would eliminate the personal exemption.
Also during the campaign, Trump proposed getting rid of the “head of household” filing status, which is mainly used by single parents. This filing status provides a lower tax rate and a higher standard deduction than filing as a single person.
Trump’s new plan is silent on this issue as well.
THE MIDDLE CLASS
The median household income in the U.S. is about $55,000, though people living in high-cost areas can make much more than that and still feel like they are in the middle class.
Doubling the standard deduction — or at least raising it to $24,000 — could provide significant tax relief to middle-income families. But whether they pay more or less depends largely on details that have yet to be released.
One of those pesky details is how Trump will structure the tax rates on individual income.
Trump has proposed reducing the number of tax rates from seven to three — 10 percent, 25 percent and 35 percent. But the administration has yet to determine the income levels for people who would be put in each bracket.
Trump’s plan has the potential to provide big tax cuts to high-income families — unless you live in a state with high state and local taxes.
Trump calls for eliminating the Alternative Minimum Tax, which was enacted in 1969 to prevent high-income people from paying no income tax. It has evolved over the years and now impacts about 5 million households, most of them making between $200,000 and $1 million a year.
In 2005, Trump himself paid $36.5 million in taxes, mostly because of the AMT. Without it, he would have paid just $5.5 million, according to a leaked copy of that year’s return.
On the flip side, Trump wants to eliminate the deduction for state and local taxes, a big tax break that benefits millions, especially people living in Democratic-controlled states with high local taxes such as New York, New Jersey and California.
Last year, more than 43 million families claimed the deduction, saving them nearly $70 billion.
These are the 1 percenters, people like Trump who make millions a year and are worth even more. Trump is proposing big tax cuts for the superrich, including repealing the estate tax.
The federal estate tax is widely misunderstood. The fact is it affects very few estates.
If your parents’ estate is worth less than $10.9 million, you don’t have to worry about this tax. This year, about 5,200 estates will pay the tax, according to the Tax Policy Center.
Trump also wants to reduce the top income tax rate from 39.6 percent to 35 percent. But perhaps the biggest windfall for rich people could come from Trump’s plan to lower the top tax rate for small business owners from 39.6 percent to 15 percent.
Rich people, including Trump, tend to report a lot of business income, Williams said.
But the true effect of this tax cut will depend on how the Trump administration defines a small business owner. If the tax cut applies to all business income reported on individual tax returns, it would be a huge windfall for many rich families.
Treasury Secretary Steve Mnuchin said Trump will propose safeguards that would prevent rich people from taking advantage of the tax cut, but he provided no details on how that would work.
Follow Stephen Ohlemacher on Twitter at: http://twitter.com/stephenatap