President-elect Donald Trump proposed big changes to the U.S. tax system during his successful run for the White House. Whether and how your taxes will change, however, are uncertain.
Why? Because the president doesn’t have the power to set tax policy or change tax rates. The Constitution gives that power to Congress.
If Congress were to back Trump’s wish list, here’s what could be in store for your tax bill.
What we know
Trump’s campaign tax proposal would affect virtually all taxpayers in some way, though it highlights high-income households and people with children. The impact of each proposal would depend on your individual tax situation.
Here’s a general rundown of what the Republican proposed during his presidential campaign.
Income tax proposals
- Collapsing the current seven income tax brackets to three:
|Current (married filing jointly)||Proposed (married filing jointly)|
|Taxable income||Tax bracket||Taxable income||Tax bracket|
|$0 to $18,550||10%||$0 to $75,000||12%|
|$18,550 to $75,300||15%||$75,001 to $224,999||25%|
|$75,300 to $151,900||25%||$225,000 or more||33%|
|$151,900 to $231,450||28%|
|$231,450 to $413,350||33%|
|$413,350 to $466,950||35%|
|$466,950 or more||39.6%|
- Increasing the standard deduction amount from $12,600 to $30,000 for joint filers and from $6,300 to $15,000 for single taxpayers.
- Capping itemized deductions at $200,000 for married couples filing jointly ($100,000 for single filers).
- Eliminating personal exemptions. The personal exemption in 2016 is $4,050; it starts phasing out after the taxpayer’s adjusted gross income hits $259,400 ($311,300 for married couples filing jointly). It phases out completely at $381,900 ($433,800 for married couples filing jointly).
- Eliminating the alternative minimum tax. The AMT is an alternative method of calculating federal income tax that runs parallel to the ordinary method. Currently, the taxpayer has to calculate the tax liability under both methods and pay whichever amount is higher.
- Eliminating the head-of-household filing status. This filing status typically is for unmarried people who pay more than half the cost to keep up a home for the year and provide most or all the support for at least one other person for more than half the year. This filing status often yields bigger deductions and more leeway on exemptions than just for single filing status. For example, the standard deduction for single status is $6,300 in 2016, but it’s $9,300 for head-of-household filers.
Bottom line: Generally, most filers could move to a lower tax bracket. Those making $18,550 or less could move from the 10% to 12% bracket, though the Trump campaign says low-income Americans will have an effective income tax rate of 0%. Those making between about $225,000 and $231,450 could be bumped up from the 28% to the 33% bracket. Taxpayers in the top tax brackets of 35% and 39.6% ($413,350 or more for married filing jointly) could drop to 33%.
Also, the decision to itemize or take the standard deduction could get less tricky for some people, and people with lots of itemized deductions could have to reckon with the proposed cap. Single parents should keep an eye on the elimination of the head-of-household status. Couples filing jointly and making less than $311,300 could lose the personal exemption, though the overall shift to a lower tax bracket may (or may not) make up for the loss.
Child care proposals
- Adding a deduction for child care equal to the state average cost of child care for children under age 13. Married taxpayers filing jointly and with AGIs above $500,000 ($250,000 for single filers) would not be eligible. Families with stay-at-home parents or grandparents also would qualify. The deduction would apply to up to four children per taxpayer.
- Adding a 7.65% spending rebate on remaining child care expenses for low-income parents through the Earned Income Tax Credit, or EITC. Married taxpayers filing jointly and with AGIs above $62,400 ($31,200 for single) would not be eligible. The rebate could be capped at 50% of the taxpayer’s payroll taxes based on the lower-earning parent in a two-earner household. The income ceiling adjusts for inflation.
- Allowing all taxpayers to make annual tax-deductible contributions of up to $2,000 into Dependent Care Savings Accounts. Leftover funds could be used for education once the child turns 18. There could be a 50% federal match for contributions of up to $1,000 per year made from the taxpayer’s EITC.
- Adding a deduction for the cost of elder care of up to $5,000 per year. Married taxpayers filing jointly and with AGIs above $500,000 ($250,000 for single taxpayers) would not be eligible. The cap adjusts for inflation.
Bottom line: Child care and caregiving expenses are a significant target in Trump’s tax plan. Families making $62,400 or less could get a boost from the child care rebate.
Other tax proposals
- Repealing the estate tax, but capital gains above $10 million held until death could be taxed (small businesses and family farms would be exempt). The proposal would not allow people to donate appreciated assets to a private charity established by themselves or their relatives.
- Repealing the Affordable Care Act net investment income tax. This is a 3.8% tax people must pay on the lesser of their net investment income or the amount by which their AGIs exceed $200,000 for singles or head of household, $125,000 for married filing separately, or $250,000 for married filing jointly.
Bottom line: Most estates aren’t subject to the estate tax now, so the proposals likely would affect only people who expect to inherit more than $5.45 million. Couples with incomes above $250,000 could get a reprieve from the ACA tax.
The big takeaway
Trump’s tax wish list is long, but should you bank on every single part of it? You will have to wait and see. Changing the tax system is a job for Congress, after all, and running any proposal by 535 lawmakers for approval won’t be easy.
Tina Orem is a staff writer at NerdWallet, a personal finance website. Email: firstname.lastname@example.org.