An Overview of Trump and the GOP’s Tax Proposals Impact on Young Professionals

Tax Expertise
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Politics aside many young professionals across America are wondering how a Trump presidency will impact their everyday lives, especially when it comes to their finances and more specifically their taxes. While many of us wish we held a crystal ball about what President-elect Trump and Congress will do to overhaul the tax situation in 2017, there’s no way to know for certain.

Historically the tax code has been dramatically overhauled roughly once in a generation or approximately every 30 years, and with the last major overhaul occurring in 1986, we’re likely due for a makeover. Increasing the likelihood of potential changes is the fact that both the White House and Congress are in control by one party—Republicans.

Here’s what could potentially change in 2017.

Simplifying the Tax Rates

Both the Republican Party and Trump are proposing taking the current tax rates (10%, 15%, 25%, 28%, 33%, 25%, 39%) from seven down to three (12%, 25%, 33%). This, for many young professionals, could result in a slight tax decrease, however, for some—depending on where the actually tax brackets eventually fall—it could lead to a slight increase in taxes. For example, the proposed Trump rates would actually increase taxes for single filers with income (AGI) between $113-192k.

young professioanls tax situation under trump proposal - kitces

An Update on Capital Gains and Qualified Dividends

Under President-elect Trump’s proposed tax structure, the capital gains and qualified dividends rates would stay the same (0%, 15%, 20%) and correspond directly to the three income tax rates, while also eliminating the 3.8% Medicare surcharge tax on investment income. The Republican proposal would simply allow all individuals to exclude 50% of their investment income (i.e. capital gains, qualified dividends, etc.)

The Good News for Young Professionals = Child Care Expense Deduction

One of the most relevant and potentially exciting changes for young professionals when it comes to the tax code would be Trump’s proposed tax breaks for families with dependent children (and adult parents). The first proposed change would be an above-the-line deduction that would allow parents to deduct child care expenses up to the state’s average cost of child care (for up to four children). This for many young professionals raising children would likely be welcome news as daycare expenses are far and away one of the largest annual expenditures for families raising kids.

In addition, Trump has also proposed the creation of Dependent Care Savings Accounts (DSCA) that could be used to save pre-tax dollars for children that could then be used on school tuition, after-school programs, and other forms of child enrichment. While these accounts would be welcome news for many young professionals raising children, they do continue to muddy the tax code waters by adding another type of account and notably these accounts are not included in the Republican proposal so there is no guarantee this will ever even come into existence.

Simplifying Exemptions and Deductions

One of the biggest potential areas of change for young professionals is the standard deduction, personal exemptions, and itemized deductions. Trump’s proposal would merely limit current itemized deductions to $100,000 and $200,000 for individuals and couples filing jointly respectively—doing very little to actually simplify the tax code.

In contrast, the Republican proposal would only keep the charitable and mortgage interest deduction and do away with all other deductions. This would dramatically simplify the tax code to the point where your taxes could actually be filed on a postcard.

Both President-elect Trump and Republicans have proposed combining personal exemptions and the standard deduction into one larger deduction. The Trump proposal calls for a standard deduction of $15,000 and $30,000 for individuals and couples respectively, while the Republican proposal calls for a $12,000 and $24,000 standard deduction respectively. Under the Republican proposal those without mortgage interest or charitable deductions greater than $12,000 or $24,000 would simply use the standard deduction, which would dramatically simplify the taxes of many.

The Likelihood of Change and Focusing on What You Should Do Now

As noted above, none of us hold a crystal ball as to what exactly will shape out with tax reform in 2017. While Republicans do have a majority of the House and Senate, they do not have the necessary 60 votes required to avoid a filibuster, meaning that Democrats could still potentially block any major changes to the tax code.

With that said, it’s likely some change to the code will occur in 2017—if not in the ensuing years—meaning that being strategic about your tax situation this year and next could mean more money in your pocket.

The biggest takeaway for young professionals heading into the end of the year and start of 2017 is to touch base with your tax expert. They—like the rest of us—do not hold a crystal ball, but will be up-to-date when it comes pending changes as they develop. If, for example, the tax code is changed it could mean lower taxes for many making it advantageous to defer income into 2017 and expedite deductions into this year (assuming we have more clarity prior to the end of the year).

About Matt Cosgriff, CFP(®)

Minneapolis Financial Planner | Intrapreneur | Young Professional | Millennial Guru | Tech Aficionado | Traveler | Food Lover | Minnesota Wild Fan | Movie Quoter | Follow on Twitter| LinkedIn

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