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On Wednesday, President Trump unveiled a proposal for a major overhaul of the nation's tax system. While the details are still sparse and nothing is finalized, here's a look at what the administration has suggested so far.
Raising the Standard Deduction
The proposal seeks to simplify tax cuts by doubling the standard deduction to $12,000 for individuals and $24,000 for married couples filing jointly. Additionally, it aims to boost the child tax credit and increase the income thresholds at which that credit phases out. The plan also intends to eliminate the marriage penalty (where some couples end up paying more taxes when they file jointly).
On the flip side, the plan would eliminate itemized deductions, including those for state and local taxes. For some taxpayers, itemizing their deductions offers greater savings, but with the new plan, they will be forced to take the standard deduction instead. While this change could benefit some, others may find it disadvantageous if they would have received more from itemizing their deductions.
The plan clarifies that certain deductions, such as mortgage interest and charitable contributions, will remain intact. Additionally, a $500 non-refundable credit for dependents who are not children would be introduced. The estate tax and the generation-skipping transfer tax, which apply to beneficiaries of gifts or inheritances, would also be repealed.
Introducing New Tax Brackets
The proposed plan aims to simplify the current seven tax brackets by consolidating them into three: 12%, 25%, and 35%.
However, the proposal does not provide specific details on how these new rates will apply to different income levels, making it difficult to predict exactly which taxpayers would benefit or how much they would save or pay. The current lowest tax rate is 10%, while the highest is 39.6%, so it's likely that high earners will see a tax reduction, while those at the bottom could face an increase.
Major Tax Break for Businesses
In line with his promise, Trump aims to lower the corporate tax rate from 35% to 20%. Additionally, the plan includes a 25% tax rate for pass-through businesses, such as sole proprietorships, partnerships, and S-corporations. According to CNBC, 95% of businesses in the U.S. are structured as pass-through entities, and they explain:
The term 'pass-through' refers to the way profits and losses of these businesses directly pass on to the owners, rather than being taxed at the corporate level like public companies.
Currently, pass-through profits are taxed at individual income-tax rates, which can go as high as 39.6 percent—higher than the top corporate tax rate of 35 percent. This disparity has long been a point of contention for pass-through business owners.
The plan also proposes shifting from a worldwide tax system to a territorial system, a major change for multinational corporations.
Under this new approach, multinational corporations would only pay taxes on their domestic earnings. At present, when companies earn money abroad and repatriate it to the U.S., they face a tax known as a repatriation tax, although they receive credit for any foreign taxes paid. The new proposal is designed to incentivize companies to bring foreign profits back to the U.S. rather than keeping the funds overseas.
The End of the Alternative Minimum Tax
The Trump tax plan proposes eliminating the Alternative Minimum Tax (AMT), a provision intended to prevent wealthy individuals from exploiting excessive loopholes.
Here’s a brief history of the AMT: As explained by the Tax Policy Center, in the late 1960s, Treasury Secretary Joseph W. Barr informed Congress that 155 taxpayers earning over $200,000 (a considerable sum at the time) had not paid any federal income tax in 1966. The AMT was introduced in response to the public outcry and to address this issue. The IRS describes the AMT as follows:
The alternative minimum tax (AMT) targets high-income taxpayers by limiting certain benefits, ensuring that they pay at least a minimum amount of tax.
Critics argue that the AMT has complicated tax filings for many middle-income earners as well. CBS News reports:
By eliminating a range of deductions, many of which are common, such as those for state income taxes, many taxpayers who aren't wealthy have found themselves paying more under this stricter method of calculating taxes. The Alternative Minimum Tax (AMT), as it is known, was never adjusted for inflation, which means over time, it started affecting more and more Americans who don't own private jets.
The counterpoint is that although the AMT has made tax filings more complicated for some middle-income earners, it still helps prevent the ultra-wealthy from nearly avoiding their tax obligations entirely.
For example, when Trump’s 2005 tax return was leaked, it revealed he paid $36.5 million—without the AMT, he would have only owed $5.3 million.
What This Means for You
Trump claims that the biggest beneficiaries of the plan will be 'everyday American workers,' and Republicans praise it as a long-needed overhaul of the tax system. On the other hand, Democrats argue it will primarily benefit the wealthiest Americans, while economists are concerned it will push the country further into debt (adding trillions to the deficit).
The theory behind the tax cut is that it will eventually pay for itself by stimulating the economy, but economist Alan Cole from the Tax Foundation states, 'There’s no pure tax cut that pays for itself.'
At the same time, it's difficult to determine the impact on 'everyday American workers' since the plan doesn't provide basic details on how various income groups will be taxed.
CBS News estimates that, in general, lower-income taxpayers will benefit from an increase in the standard deduction. However, taxpayers living in high-tax states could find themselves at a disadvantage, as state and local tax deductions may be eliminated. They report:
These states are mostly blue states like California and New York. The GOP plan retains deductions for home mortgage interest and charitable donations, allowing taxpayers to continue claiming them. State and local tax deductions, which primarily benefit high-income individuals who itemize their deductions, will be affected. The Tax Policy Center reports that households earning more than $100,000 would bear 90% of the tax increase, and those earning more than $500,000 would shoulder 40% of it.
Once again, nothing is finalized yet, and the plan still has to pass through Congress. Before anything is approved, Congress will need further details and likely some significant modifications.
