The question of whether you’ll be paying more in taxes under President Donald Trump may hinge on how much you use tax deductions now.
The Trump administration Wednesday unveiled the broad outlines of his campaign promise to overhaul the sprawling U.S. tax code with a simpler system that lowers tax rates. But even as those rates come down, closing loopholes and eliminating popular deductions will expose more of the average household’s income to taxes.
It remains to be seen how deeply the plan cuts into the most widely used deductions, which cost the government hundreds of billions of dollars in lower taxes.
One of the critical questions the plan will have to address is whether the elimination of tax breaks will make up for revenues lost from lowering tax rates.
Mnuchin repeated the administration’s pledge that the proposal “will pay for itself” over time as the economy grows and the tax base widens.
For individuals, the Trump administration is proposing cutting the number of personal income tax rates from seven to just three brackets: 10 percent, 25 percent and 35 percent.
The plan also proposed increasing the standard deduction, effectively eliminating taxes on the first $24,000 of a couple’s income. The estate tax and alternative minimum tax would also be eliminated, along with a 3.8 percent investment tax imposed under the Affordable Care Act.
National Economic Council Director Gary Cohn told reporters that “homeownership, charitable giving and retirement savings will be protected, but other tax benefits will be eliminated.”
Those deductions include some of the most popular provisions of the tax code, because they allow households to cut their tax bills by writing off expenses like home mortgage interest and taxes paid to state and local governments.
Curbing those deductions could help simplify the process of filing a tax return, but would also raise the amount of income subject to taxes. That impact would also vary widely from one household to another, regardless of their current tax bracket.
Most households aren’t even aware of the biggest break for individuals that many of them get when they file their return.
That one currently goes to households whose employer pays their health insurance premium. If those payments were counted as income, they would raise an estimated $863 billion over the next five years, according to a report from the Congressional Joint Committee on Taxation.
Most of the biggest tax breaks currently go to individuals, according to the report, including the earned income tax credit for low-income households ($699 billion over five years), tax cuts on capital gains and dividends ($678 billion), 401(k) and other defined contribution retirement plans ($584 billion) and the child tax credit ($584 billion.)
Though the current tax code is full of tax loopholes for corporations, the biggest single tax break applies to deferred foreign income, which will cost an estimated $587 billion over five years. Go to CNBC to read more.