Friday, April 28, 2017

How Would the Trump Tax Plan Impact the Average Family?

This is a bit off topic. However, I think this is important information for people to understand since a major tax change like this will most certainly impact the average person. It's far too early to tell how the proposed new tax plan would impact individuals. I will use a pretty typical example of an average US family of four (two kids) to illustrate why I say this.

Let's take a family of four where the parents generate an average gross income of $75,000 per year. We will be generous and assume this family uses the standard deduction of $12,700 and takes four personal exemptions which total $16,200 (4 x $4050). The parents are employees and have no special other tax deductions like business expenses, etc. How does the proposed Trump tax plan impact this family? Let's look at it.

Under current tax rules:

The family would start out with gross income of $75,000. From this they would deduct the $12,700 standard deduction PLUS the $16,200 worth of personal exemptions (a total of $28,900 in total income reductions). This would leave a taxable income of $75,000 less $28,900 or $46,100.

The current tax rates on $46,100 would work like this for this family filing as "Married Filing Jointly". The first $18,650 would be taxed at 10% ($1865 in tax). The income above $18,650 up to $46,100 would be taxed at a 15% rate (46,100-18,650=27,450 x .15=$4118 in tax). The total income tax due would be $1,865 + $4,118=$5,983.

So how does this change under the Trump tax proposal? This is where it gets impossible to project. The plan released for individuals simply does not provide enough information to make any kind of real projection. This is because we don't know if the personal exemptions will be kept or at what income levels the 10%, 25%, and 35% tax rates will be applied.

We will use two different assumptions to show how different the results could be depending on the answers to these unknowns.

Case 1 - Personal exemptions are retained and the 10% tax rate is used up to taxable income of $70,000 before you move to the %25 rate. 

Under this assumption, the family would get a big tax reduction as follows:

Gross income of $75,000 would be reduced by BOTH the new higher standard deduction of $25,400 AND four personal exemptions that total $16,200. This would reduce taxable income to $33,400 (75000-25400-16200=$33,400). The tax rate of 10% would result in a total tax due of $3340. This is $2,643 less than the family would owe under current tax rules. Most everyone would call that a big tax reduction as the plan is being touted.

Case 2 - Personal exemptions are NOT retained and the 10% tax rate is used up to taxable income of $40,000 before you move to the %25 rate (keep in mind that now the tax rate jumps to 25% instead of %15).

Gross income of $75,000 would be reduced by ONLY the new higher standard deduction of $25,400.This would reduce taxable income to $49,600 (75,000-25,400=$49,600). Please note that if the personal exemptions are no longer permitted, this family actually has MORE taxable income now, not less

The tax rate of 10% would apply to the first $40,000 in taxable income for a total of $4000 tax due on that part of their income. The taxable income above $40,000 of $9,600 would be taxed at a new much higher rate of 25% now for a tax due of $2400 on that part of their income. The new total tax due would be $6,400 ($4,000 + $2,400). This is actually $417 MORE in taxes due than they would owe under the current tax rules. Most everyone would feel deceived at calling the new tax plan a "large middle class tax cut" under this assumption. 

So which assumption above is more likely? We simply don't know. The plan released left most all of the key details out. It's up to Congress to decide. As you can see, depending on what Congress decides, the family above could see their taxes change by a range of just over $3000 a year. They could even see their taxes go up. 

Conclusion: This is why it is too early to say what the real impact of this plan might actually be on most average US families. We would assume that Congress would not use Case #2 that would actually INCREASE taxes on most average families after this plan being touted as a big tax reduction for the middle class. 

But who really knows? Until the key details are filled in, it is simply wrong to promote this plan as a big tax reduction for the average middle class US family. It might be or it might not be. Why tell the public it WILL be when you really don't know for sure since most of the key details are left up to Congress?


  1. I think many Americans, at least the upper middle class who follow monetary and tax policy would love to only pay 25%.

  2. Under the current tax rates, A married filing jointly family of four does not pay more than a 25% tax rate until they have taxable income of more than $153,000 (probably gross income of at least $175,000). They don't pay more than even a 15% rate if gross income is $100,000 or less. By far, most of what is normally called "middle class" falls under $150,000 in taxable income. Upper middle class (above $175,000 in gross income as defined here) is a relatively smaller portion of the overall middle class. So that is why I say touting this as a big middle class tax cut is unwise until more details are provided. No doubt that people making more than $200,000 per year will get a good reduction most likely if the plan is passed by Congress.