America desperately needs a tax overhaul to fix a system that has become unwieldy and difficult for business. Reforms could boost the economy, and even the thought of tax reforms has sent markets soaring. Here, from Fidelity, are fourteen tax changes that could show up in any potential reform package.
Tax rates: The Trump plan and the House plan would both cut the top rate to 33 percent from 39.6 percent, raise the lowest rate to 12 percent from 10 percent, and collapse the number of brackets — different tax rates at different income levels — to three from seven. The Senate leadership has not yet weighed in on rates.
Itemized deductions: The Trump plan would cap itemized deductions at $200,000 a year for married couples filing jointly and $100,000 for single filers. To take an itemized deduction, you subtract the specific item from your income, which reduces your taxes. But under the Trump plan, the standard deduction would increase, so many people who file itemized returns now may not find it in their interest to do so in the future.
Mortgage interest and real estate tax deductions: The itemized-deductions cap proposed by Mr. Trump would effectively limit interest and real estate tax deductions for the owners of expensive homes — a backdoor way of curtailing them. There has been talk in Congress for years about limiting or eliminating itemized deductions for mortgage interest (interest payments on up to $1 million in mortgage debt are now deductible), usually in conjunction with raising the standard deduction, although these changes are not part of the current House plan. The real estate industry has lobbied strenuously to retain the interest and real estate tax deductions, which are important for many homeowners.
Filing status: The president’s plan would eliminate the head-of-household filing category, which gives more favorable rates to some unmarried people who can claim dependents than to single taxpayers.
Standard deduction: Mr. Trump would increase the standard deduction to $15,000 from $6,350 for single filers and to $30,000 from $12,700 for married couples.
Personal exemptions: Mr. Trump has also proposed doing away with exemptions for taxpayers and their dependents, which are worth $4,050 each. (An exemption is like a deduction; you can subtract the amount of the exemption from your income and cut your tax bill.) Those exemptions now begin to phase out at an adjusted gross income of $259,400 for single taxpayers and $311,300 for married couples, and disappear completely for incomes above $381,900 for single filers and $433,800 for couples.
Carried interest: Mr. Trump has said that carried interest, which is income earned by general partners in private equity and hedge funds, should be taxed as ordinary income. Under current law, it is taxed at the lower capital gains rate.
Dependent-care deductions: Under the Trump plan, even if taxpayers don’t itemize, they would be given more liberal credits for care of children and older adult dependents. The credits would not be available to individuals with adjusted gross incomes of more than $250,000 or to couples with more than $500,000 in income. Tax credits are more valuable to taxpayers than deductions, because credits are subtracted from the tax that is owed, not from the income on which that tax is based.
Alternative minimum tax: Under the Trump plan, this tax, known as the A.M.T., which limits some deductions for many high earners and effectively raises the amount of tax they owe, would be repealed.
Capital gains tax rates: The Trump plan does not call for lowering the rates on long-term capital gains, which now top out at 20 percent for the highest earners — single filers with adjusted gross incomes above $415,050, and couples with incomes above $466,950. The House plan would lower capital gains rates.
Capital gains Medicare surtax: Mr. Trump proposes ending the 3.8 percent surtax on investment income from capital gains, which affects single taxpayers with adjusted gross incomes over $200,000 and couples with incomes over $250,000. (If the income over those thresholds is less than the capital gain, the lower amount is subject to the 3.8 percent tax.) That surcharge was instituted as part of the Affordable Care Act. If the health law is repealed, the surcharge will probably be eliminated.
In addition, repeal or revision of the Affordable Care Act may affect these areas:
Medical deduction: Taxpayers who itemize can currently deduct medical expenses that amount to more than 10 percent of their adjusted gross income. That amount rose from 7.5 percent (where it remains for people over 65) as part of the Affordable Care Act. If the act is repealed, will the rate go back down? That’s uncertain.
Fines for not having medical insurance: This penalty, part of the Affordable Care Act, is not really an income tax, but it is reported on tax returns and many people think of it as one. It is based on a complex sliding scale, and can be $695 a year for an individual and $2,085 for a family, or in some cases significantly more. That penalty could be eliminated.
Medicare payroll tax: This isn’t really an income tax, either, although the amount paid appears on the standard W-2 income statements that employers fill out. The Affordable Care Act raised the payroll tax by 0.9 percent on single taxpayers with gross wages of over $200,000 and couples with incomes over $250,000. That will presumably be eliminated if the act is dismantled.