“Big League” Tax Plan

By April 27, 2017Finances, Investing, Taxes

Welcome To The Big Leagues

The Trump administration Wednesday unveiled their new tax plan dubbed, “the biggest tax cut and the largest tax reform in the history of our country,” said Treasury Secretary Steve Mnuchin.

Here’s what we know so far and how it affects you and your money.

Individuals

The new plan calls to lower the number of tax brackets for individuals from seven to three. 10%, 25% and 35%, respectively. Rates for 2017 are currently 10%, 15%, 25%, 33%, 35% and 39.6%.

3 is certainly simpler than 7, but without the information regarding which income levels apply for each bracket (details not yet known), it’s tough to say yet whether this will raise or lower your tax bill.

Another big piece of news is the proposal to double the standard deduction for individuals. This moves the deduction for married couples filing separately and single individuals from $6,300 up to $12,600 and the deduction for married couples from $12,700 up to approximately $24,000. National Economic Director Gary Cohn said, “that a married couple will not have to pay taxes on the first $24,000 it earns.”

That’s huge for the average American household, which has an average income of around $52,000. Depending on when that 15% rate kicks in, average households in America could end up paying very little in tax.

Other details released in the plan concerning the repeal of the Alternative Minimum Tax, the estate or “death tax”, and the 3.8% Medicare surtax. The latter of these, called the net investment income tax, affects individuals and married couples who earn investment income and have a Modified Adjusted Gross Income (MAGI) over a certain amount. 

A lot of deductions get the ax in the proposal, with just the benefits for retirement savings, charitable giving and mortgage interest remaining. The ability to save for retirement in a tax-deferred and tax-free way is key, so this is good. Homeowners will continue to benefit in being able to deduct mortgage interest and charitable contributions.

Business

According to Cohn, “In 2017 we are still stuck with a 1988 corporate tax. That’s why we are one of the least competitive countries in the corporate world when it comes to the corporate tax.” I agree.

The corporate tax rate in the U.S. is 35% and the Trump plan looks to cut it down to 15%. This is a big deal on many levels. If companies are paying 20% less in taxes that’s an immediate 20% increase in profits. Increasing profits drive stock markets higher.

Furthermore, there is more money left to be paid out in dividends to shareholders. With the Baby Boomer generation entering retirement, the ability for corporations to pay out more in dividends helps those people tremendously.

A lower corporate tax rate makes the U.S. more competitive for business purposes. Less money to taxes is more available to hire new workers, expand and pay current workers more. Also, it’s been well documented that corporations have been leaving the U.S. through ‘corporate inversion’ in order to take advantage of lower tax rates overseas in countries like Ireland.

The proposal also calls for a territorial tax system, as opposed to a global tax system, meaning U.S. companies would only owe U.S. tax on what they earn here in the U.S. That’s huge because it’s estimated that companies are holding an estimate $2.6 trillion in profits overseas. The Trump plan calls for a one-time tax on these profits to bring them back into the U.S. All this is good for the U.S. economy.

Haters of the tax plan will point and ask how the plan pays for itself. The Trump Administration says the plan will pay for itself through an increase of economic output and subsequent increases in tax revenues.

My Take

We’ve tried the route of higher taxes and higher government spending. You can’t tax and spend your way to prosperity. I think the tax proposal is a step in the right direction. If we can avoid jumping into foreign entanglements that waste trillions of dollars, we just might be able to turn this plow-horse economy into a race horse, and work on getting our U.S. financial house in order.

John

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