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How Trump's tax plan would affect households

USA TODAY logo USA TODAY 4/27/2017 Paul Davidson
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President Trump’s tax reform plan will benefit most U.S. households and make filing taxes simpler but it will provide the biggest windfall to the wealthy, experts say.

“It’s a very lopsided plan to the top end of the income scale,” says Chuck Marr, director of federal tax policy for the Center for Budget and Policy Priorities.

Here’s a look at some of the main provisions:

•The current seven tax brackets will be streamlined to three --10%, 25% and 35%. The top rate will drop to 35% from 39.6%. But the Trump administration has not said which income ranges would apply to those brackets.

Alan Viard, resident scholar at the American Enterprise Institute, says administration officials will almost certainly ensure that no one pays a higher rate on the same income. Yet the elimination of most deductions could nudge some wealthier Americans into higher brackets, he says.

Overall, Marr notes the Tax Policy Center has estimated the top 1% of households would see a 14% increase in after-tax income, while low and middle-class Americans would see gains of just 1.2% to 1.8%.

•The standard deduction, currently $6,350 for single people and $12,700 for married couples, would double. As a result, many more low to moderate income families would pay no taxes. But all other deductions, except for mortgage interest and charitable contributions, would be eliminated, including state and local taxes and medical expenses. 

About 70% of Americans, mostly low- to moderate-income, currently take the standard deduction and would benefit, Viard says. Many of the remaining 30% who itemize, largely higher income households, would likely switch to the standard reduction, leaving only about 5% itemizing, he says.  Some wealthier Americans could end up paying higher taxes, though most would save. Marr says scrapping the state and local provision would have the biggest impact and would largely hurt Americans in “blue,” or Democratic states on the coasts that pay higher state and local tax rates.

Veronique de Rugy, senior research fellow at the Mercatuss Center at George Mason University, says the elimination of millions of people from the tax rolls would mean a big decline in federal revenue.

•The estate, or so-called “death,” tax, would be scrapped. The 40% tax currently applies to a $5.5 million inheritance for individuals and $11 million for married couples.

“You ran on a populist agenda but it’s wealthy heirs who will pay no taxes,” Marr says.

And James Nunns, a senior fellow at the Tax Policy Center, says that getting rid of the tax removes the incentive for the wealthy to make charitable contributions.

But Viard says the tax unfairly hurts households that have spent a lifetime building up savings.

•The alternative minimum tax -- which generally hits households with incomes of at least several hundred thousand dollars – would be ditched. The current rate is 28% for income that qualifies, and it hits individuals who otherwise would benefit from a sharply lower effective tax rate because of deductions.

Marr calls this another gift to the wealthy. Yet Viard says deductions that aren't favored should be eliminated, but those that are valid shouldn’t be negated with an alternative tax.

•A 3.8% tax on tax on the interest, dividends and capital gains of higher income households that helps fund the Affordable Care Act would vanish.

“It’s a terrible idea” that would favor the affluent and reduce funding needed for the health care law, Marr says.

Contributing: Roger Yu

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