On Wednesday, President Donald Trump unveiled his updated tax proposal during a speech in Indianapolis, calling it a “giant win for the American people.”
It likely will be for some Americans. But whether you’re among them depends on your current income, where you live and the deductions you claim.
Here’s how it breaks down:
1. Fewer tax brackets
As outlined in Trump’s earlier proposal, we’d go from seven income tax brackets—ranging from 10 percent to 39.6 percent—to three: 12 percent, 25 percent and 35 percent. The new framework suggests there may be a fourth (currently unspecified) rate for the wealthiest Americans.
That would suggest lower income Americans now in the 10 percent bracket could see their tax bracket rise to 12 percent. But White House economic advisor Gary Cohn told CNBC Thursday that the increase in the standard deduction (see below) should offset any increase in the bottom tax bracket.
2. Higher standard deductions
The standard deduction would nearly double from $6,350 to $12,000 for individuals and from $12,700 to $24,000 for married couples filing jointly. That’s good news for the nearly two-thirds of Americans who take the standard deduction instead of itemizing.
But it’s not the whole story. The additional standard deduction—available to those age 65 and older and people who are blind—and personal exemptions would be eliminated. For example, a retired married couple over 65 could currently deduct $23,300, given the 2017 standard deduction ($12,700), additional standard deductions ($1,250 each) and personal exemptions ($4,050 each). A younger couple who couldn’t take the additional standard deductions could deduct $20,800. So a $24,000 standard deduction would be simpler, but not dramatically more.
3. Greater tax credits for dependents
If you have kids, that $4,050 exemption you take for each would be eliminated. But the plan would increase the child tax credit from the current $1,000 to a higher (unspecified) amount. You could also claim a $500 credit for “non-child dependents,” such as elderly relatives.
4. Elimination of most itemized deductions
The framework says “most” deductions would disappear, which may include deductions for medical expenses and disaster damage, as well as the deduction for state and local income tax. The latter could present a particular burden for those living in states with high state income taxes. For example, in 2014, the federal deduction for state and local taxes reduced taxable income by $101 billion in California, $68 billion in New York and $31 billion in New Jersey.
The framework does specify that it would maintain deductions for mortgage interest and charitable contributions. However, the National Association of Realtors says the new plan could actually lead to higher taxes for homeowners—and ultimately disincentivize Americans to purchase new homes—because of the eliminated provisions like state and local tax deductions. Without those and others, many homeowners would likely not benefit from itemizing, so they wouldn’t claim the mortgage interest deduction.
So what’s next?
A long and uncertain path. “This still has to get through both houses of Congress before it gets to the President’s desk,” says Certified Financial Planner and Certified Public Accountant Jeff Levine, CEO of Blueprint Wealth Alliance. There is already strong opposition from many Democrats, but there is also likely to be resistance from some members of the Republican party, particularly the deficit hawks.
“And there are still lots of gaps that need to be filled to fully understand the potential impact to households at various income levels,” he adds.
September 28, 2017