Donald Trump will be inaugurated in just over two weeks and will begin to implement his promised policies. That includes potentially significant changes to the tax code. We know, every presidential candidate in your lifetime has pledged to reform the tax code, but those promises rarely bear fruit. But Trump, backed by a Republican-controlled House and Senate, might actually be able to get his tax plan passed.
Here’s what could change and what it could mean for lawyers like you.
Fewer Income Tax Brackets Could Mean Higher Tax Rates
When it comes to Trump’s income tax plan, the major feature is the reduction of brackets. Under the current system, there are seven tax brackets, taxed at 10, 15, 25, 28, 33, 35, or 39.6 percent. Under Trump’s plan, there will only be three income tax brackets, taxed at 12, 25, or 33 percent.
For anyone making $413,350 or above, that simplification means a tax rate reduction. For many American workers, the tax rate will stay the same. For some, Trump’s changes will mean a higher tax rate.
Take a lawyer making $80,000, for example. She’s currently paying 25 percent in income taxes, not accounting for any deductions other aspects of the tax code. Under Trump’s plan, her rate will be the same. If she was making $100,000, however, her single filing rate would drop, from 28 percent to 25 percent. (If filing jointly, those making $151,900 to $225,000 would drop from 28 to 25 percent.)
But some attorneys will likely see themselves bumped up, from a 28 percent rate to the top 33 percent bracket. Single filers who make $112,500 to $190,150 will find themselves in the highest tax bracket now, meaning a 5 percent increase in federal income taxes. (Joint filers making $225,000 to $231,450 will see the same increase.)
The average attorney made $115,820 in 2015, according to the Bureau of Labor Statistics. Those lawyers would see themselves moved into a higher tax bracket under Trump. Other changes to taxes could offset that increased rate, however.
— MarketWatch (@MarketWatch) December 12, 2016
It’s Not All Just Tax Brackets, Though
More will change than just tax brackets. Trump is also proposing a cap on itemized deductions, limiting them to $200,000 for joint filers and $100,000 for single filers. For those with high mortgage rates, state sales and income taxes, or health care costs, that could result in more taxes. However, the elimination of the Alternative Minimum Tax could offset this increase for high earners.
Trump’s tax changes could have impacts on taxes for parents, as well. His tax plan includes a deduction for childcare costs for children under 13, though the exclusion would not apply to those earning $250,000 if filing singly or $500,000 if filing jointly. Head-of-household status would also be eliminated, meaning that some single parents may end up paying more taxes.
Finally, Trump’s tax plan proposes to increase the standard deduction to $30,000 for joint filers and $15,000 for single filers. That’s more than twice the current standard deduction.
Of course, all these changes will have to get through the political process first and few plans survive that unchanged. In the meantime, you might want to seek out a good accountant.