President Donald Trump staring into the distance with many tax forms behind him

The Truth About Trump’s Tax Plan

With internet news comes rumors and hyperbole; what makes tax reform different?  Nothing.

Social media is swarming with articles and tweets of how Trump’s tax plan will punish the middle class to fund tax cuts for billionaires. True? argues that those making $8.5M per year receive massive $1M tax cuts while middle class taxpayers save only $1,000. Of course, the top earners to which MSNBC refers currently pay upwards of $3.7M per year in taxes (wow!) while the lower income earners are paying close to $5,500.  CNBC claims the top earners save 27% under Trump’s plan while lower income earners save only 10%.  USA Today ran this exact same article. Do these numbers pencil out?

Let’s look at a single parent with one child earning $75,000 per year.  Under current law that taxpayer gets $8,100 of personal and dependent exemptions and a standard deduction of $9,350 resulting in taxable income of $57,550, and a tax liability of $6,970 (accounting for a $1,000 child tax credit). Under president Elect Trump’s tax plan, the same taxpayer is allowed a standard deduction of $15,000 but no personal and dependent exemptions (Trump eliminates them as part of his simplification initiative). However, Trump allows a child care deduction[1] ranging from $7,000 to $12,000 (let’s use the average, $9,500 for our calculations) resulting in taxable income of $57,550. Trump’s tax rate is only 12% resulting in a tax liability of $6,060. This is a savings of $910 per year (or 13%).

Tax savings, however, decrease for taxpayers with more dependent exemptions. For example, consider a similarly situated taxpayer with $90,000 of income and three children; under today’s law the tax liability is $9,410 (again allowing for the child tax credits), while Trump’s tax plan results in a tax assessment of $5,580. Here the savings is $3,830 (or 41%).

Let’s consider a single person with no children earning $50,000. Under today’s tax law, the tax liability is $5,277, while under Trump’s tax plan they pay only $4,200, a savings of $1,078 (or 20%). What about a married filing joint taxpayer with one child earning $90,000? Under current law their tax bill is $7,860, but under Trump its only $6,060, a savings of $1,800 (23%).

Considering these four middle class taxpayers with income ranging between $50,000 and $90,000, their average savings is 21%. The argument, however, is that Trump’s tax plan hurts most those with many children. Let’s consider a family of 5 children (ages 6 to 20) and incomes of $100,000 versus $200,000.

Under current law a family of 7 earning $100,000 has a tax liability of only $4,930[2], while under Trump’s tax plan they pay only $3,840, a 22% savings. For the same family earning $200,000, Trump’s tax plan saves the taxpayer $5,627 or 19%.  Not too shabby. Let’s also consider a married couple with only 1 child earning $150,000. In this case, the taxpayers save $3,980 or 18%, while a married couple with $150,000 of income and no children save $2,618, or 11%.

Note that the married couple with one child earning $90,000 saves 23% while the same taxpayer earning $150,000 saves only 18%; however, the lower income heads of household taxpayers save less than the other categories, averaging 10%. Certainly, those who pay very little have less room for savings, while those who pay a lot have greater room to save, thus it makes sense that the higher income earners who currently bear 90% of all taxes paid will have a greater savings.

Overall, considering the small cross section of 8 middle class taxpayers described above, the average tax savings under Trump’s simplified tax system is 17%; not too shabby and almost double the savings reported by MSNBC.

[1] Current law, arising out of Bill Clinton’s administration with a Republican House and Senate, allows a child tax credit for qualifying children, phased out for earners over $75,000 for single and $110,000 for married filing joint. The he rules are so incredibly difficult to understand that most people can’t figure it out without a CPA.  As part of President Elect Trump’s tax simplification focus, those complex rules are repealed in lieu of a simple child care deduction.
[2] Assuming the taxpayer qualifies for 3 child tax credits without phase out.

About the Author Whitney L. Sorrell, JD, CPA, MBA

Whitney Sorrell is a former IRS Revenue Agent turned tax attorney and CPA.  Mr. Sorrell’s law practice focuses on business organizations and federal tax planning, IRS dispute resolution, asset protection planning for small business owners, and estate planning for nigh net worth individuals.

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