Use this simple free spreadsheet to calculate your potential tax liability under the proposed tax reform measured presented by President Trump and the House. SO easy-all you need is your 2016 tax return!

Calculating Your Potential Tax Liability Under Proposed Tax Reforms

Use this simple free spreadsheet to calculate your potential tax liability under the proposed tax reform measured presented by President Trump and the House. SO easy-all you need is your 2016 tax return!

Now, this isn’t a political blog and it never will be. The name of a certain political figure has never hit the blog pages until today, even throughout the pre and post-election. As you may expect, though, I’m not here writing opinion articles about politics of any sort. I’m just here helping you answer a simple question that I know you’ve just been dying to ask.

How will my federal income tax liability change as a result of the proposed tax reforms presented by President Trump and the Republican House?

The totals are out there in the news about how it will mean trillions of dollars ($3 trillion for the House plan and $6-7 trillion for Trump’s plan) in less tax revenue overall. But does that really mean anything to you at all? Nope, and it means nothing to me either (well, except that it makes me cringe that the government is so bad with money).

An updated proposal is expected in the next couple weeks, but I’ve summarized the current information we have regarding the tax changes below. I’ve also provided a resource for comparing your 2016 tax liability to the amount of tax you would owe based on the tax reforms proposals (hint: it’s a spreadsheet and it’s awesome).

TRUMP TAX REFORM PROPOSALS

The major tax changes proposed by President Trump include:

  • Raising the standard deduction: The new standard deduction for single filers and those married filing separately would be $15,000 and married couples filing jointly would be allowed $30,000. To compare, the current standard deductions are $6,300 for single/married filing separately and $12,600 for married filing joint.
  • Eliminating personal exemptions: The increase in the standard deduction comes at the price of eliminating all personal exemptions, which are $4,050 per person for 2016 tax returns.
  • Capping itemized deductions: Itemized deductions would be capped at $100,000 for single filers/married filing separately and $200,000 for those married filing jointly. In addition, state and local income taxes would no longer be allowed as an itemized deduction.
  • Condensing income tax brackets: The current 7 income tax brackets (10%, 15%, 25%, 28%, 33%, 35% and 39.6%) would be adjusted into only 3 income tax brackets (12%, 25% and 33%). A great illustration of how the current tax brackets would be converted to the new tax brackets is shown here.
  • Eliminating the head of household filing status: The head of household filing status allows unmarried individuals that support a qualifying dependent (such as a child) to have some additional tax advantages over filing as single taxpayers. These currently include wider tax brackets and a larger standard deduction among other benefits. These benefits would be eliminated.
  • Eliminating health care taxes that were added with the ACA: The .9% additional Medicare tax on earned income and 3.8% additional tax on investment income would be eliminated under Trump’s tax reform measures. These taxes are only paid by high-income individuals with over $200,000 (single)/$250,000 (married) of annual income. In addition, the penalty for not having health insurance will likely be eliminated through the repeal measures currently being enacted.
  • Elimination of the Alternative Minimum Tax: The AMT was originally designed to make sure that high-income individuals didn’t avoid paying tax, but now affects millions of middle-class Americans. Getting rid of the AMT would decrease tax for those that have significant itemized deductions that are not allowed under the AMT.
  • Allowing child care expenses to be deducted instead of a credit: Trump’s proposal allows child care expenses to be included as an above the line deduction, decreasing adjusted gross income and possibly allowing for more of a benefit for those who qualify.

As you may expect as you go through these items, these changes will only benefit some people and result in tax increases for others.

A single filer without dependents that takes the standard deduction (previously getting $6,300 plus $4,050 personal exemption) will benefit from a higher $15,000 standard deduction, despite not having any personal exemptions.

In contrast, individuals and couples with many children will likely see higher tax liability due to the elimination of personal exemptions, even if they benefit from the increased standard deduction.

And, of course, the millions of Americans that qualify for head of household filing status will likely face higher income taxes.

HOUSE TAX REFORM PROPOSALS

The major tax changes proposed by the House include:

  • Raising the standard deduction: Single filers and those married filing separately would be allowed $12,000 and married couples filing jointly would be allowed $24,000 for the standard deduction. As a comparison, the current standard deductions are $6,300 for single/married filing separately, $9,300 for head-of-household filers and $12,600 for married couples filing jointly.
  • Eliminating personal exemptions: The increase in the standard deduction comes at the price of eliminating all personal exemptions, which are $4,050 per person for 2016 tax returns.
  • Eliminating most itemized deductions: The only itemized deductions that would be allowed under the House plan are mortgage interest and charitable contributions.
  • Condensing income tax brackets: The current 7 income tax brackets (10%, 15%, 25%, 28%, 33%, 35% and 39.6%) would be adjusted into only 3 income tax brackets (12%, 25% and 33%). The income levels for each tax bracket differs from the brackets offered under the Trump plan.
  • Adjusting preferential treatment on interest income, qualified dividends and capital gains: The old rule allowed for 0%, 15% and 20% rates for qualified dividends and capital gains. The House plan expands the preferential treatment to interest income as well and instead allows for 50% of these types of income to be taxed at ordinary rates and 50% to be allowed tax-free. This essentially provides new rates of 6%, 12.5%, and 16.5%.
  • Eliminating health care taxes that were added with the ACA: The .9% additional Medicare tax on earned income and 3.8% additional tax on investment income would be eliminated under Trump’s tax reform measures. These taxes are only paid by high-income individuals with over $200,000 (single)/$250,000 (married) of annual income. In addition, the penalty for not having health insurance will likely be eliminated through the repeal measures currently going on.
  • Elimination of the Alternative Minimum Tax: The AMT was originally designed for high-income individuals, but now affects millions of middle-class Americans. Getting rid of the AMT would decrease tax for those that have significant itemized deductions that are not allowed under the AMT.
  • Increasing the Child Tax Credit: The child tax credit is currently set at $1,000 and starts to phase out for married filers with $110,000 in adjusted gross income or married filing separate filers at $55,000 and single/head of household filers at $75,000. The expanded child tax credit under the House plan would increase the credit to $1,500 and increase the phase-out for married couples to $150,000.

The House tax plan is similar in many ways to Trump’s plan but has some noticeable differences such as the drastic changes to itemized deductions and the increase in the child tax credit.This plan will benefit those that will be able to take the child tax credit since the personal exemptions will be eliminated.

In addition, wealthy individuals and couples will see a lower tax rate (as with Trump’s plan) due to the elimination of the health care taxes and the lowering of the highest tax bracket from 39.6% to 33%.

COMPARING 2016 TAX TO PROPOSED TAX REFORM TAXES

The following spreadsheet will help you to be able to determine the prospective amount of your tax liability based on your 2016 tax return.

To use this spreadsheet, download it for excel via the link in the preview above or edit it online by clicking “view full-size workbook” in the lower right-hand corner.

Using your 2016 tax return as a guide (if it’s not yet completed, you should wait until it is finished to use this tool or use a draft), enter each line requested only in the yellow highlighted cells. Be sure to carefully pay attention to the schedule/form and line in each description.

If the calculated tax liability from line 44 of the tax return matches the spreadsheet calculation, you should be all set to analyze the columns that show the impact of the Trump and House tax reform proposals.

If the tax does not match, it’s likely that there are additional complicated calculations on your tax return that are outside of the scope of this simple tool. (Comment below or contact me if you have questions and I’ll help you!). Be sure to take a look at the comments that further explain the impact of the reforms by hovering over the cells with the red triangle in the upper right-hand corner.

FINAL THOUGHTS

The answer to the question “Will my taxes be lower under the proposed tax reform measures?” is simply “It depends on your personal tax situation”. That’s why it’s so essential in every area of personal finance to take a detailed look at your individual situation and plan accordingly. It’s definitely true here, as you may be expected by the results of this calculation.

Now, I said this wasn’t an opinion piece but after running my own tax scenario and finding that I’ll likely be paying an additional 83% with the Trump plan and 60% with the House plan, I’m going to say that I think both are terrible options. I have a great idea that will save the country trillions of dollars: leave the taxes as is. And there you have it: the most political post I’ll ever write.

If you run this analysis, I’d love to hear how you feel about the tax reform plans and how they’ll affect you in the comments below!

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6 Responses

  1. As long as I filled this form out correctly (which is an amazing tool, by the way!), our tax bill will decrease 26.65% via Trump’s Plan, and decrease 20.76% with the House Plan. Full disclosure, we are married filing jointly, one dependent that qualifies for the child care credit, AGI was $102k.

    1. I ran SO many different calculations (both to make sure it was working properly and out of curiosity) and was surprised by a lot of the results. That’s great for you because it definitely looks like many of these changes are going to be implemented. I think it will be closer to the House plan, not the Trump plan. I’m definitely going to update this (or create a new one) once they really start rolling out more concrete versions of the plan.

  2. Overall I think the Trump tax bill is positive. However, as my college tax professor said once, “we need to plan under current law as that’s the only law that’s certain.”

    I have found with time that changes are incremental and slow. I doubt they will get rid of head of household status, too many single mom’s and divorcees claiming it. Elected politicians don’t like upsetting the status quo.

    I hope they do make some positive changes, but they won’t be real reform or anything that shakes the foundation too much.

    One more note, the CBO is ridiculous when they say a reform bill will “cost revenue.” The US has the highest corporate income tax in the world and if your rate went down, we would be certain to collect more revenue as economic activity would increase. These analyses never take into account changes in behavior based on changes in the tax code. Investments in US business would be certain to increase once guys like me did the math that stated returns would be higher, due to lower tax rates.

    1. I think it will be much, much closer to the House plan than the Trump plan, especially like you said with regards to the head of household filing status. It’s too late to go into effect for 2017 anyway, but I’m sure that there will be a lot of back and forth once there is even a more finalized plan presented. I’ll be interested to see what that ends up being.

      I saw a great summary that included the impact of economic growth as well (maybe from the tax policy institute?). It still seemed like there was a significant gap in government revenue, but certainly not as much like you said as the immediate impact.

  3. It looks like I would be better off by 2%. Not nearly as much as the media would make me think. Although for whatever reason I couldn’t change the $25,000 itemize deduction line. Although it may just be as it’s getting late and my brain isn’t working nearly as well 🙂

    1. It may be confusing – you can edit one $25,000 (yellow highlighted cell in C21) but the other one (D25) automatically pulls the higher of itemized or standard deductions.

      2% better is something at least!

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