President Trump’s new tax cut proposal aims to extend previous tax cuts that were set to expire in 2017. This move largely maintains the current tax obligations, ensuring that taxpayers won’t notice much difference in what the government withholds from their paychecks.
Some new tax cuts are on the way through Congress, but most of them are temporary, with expected expirations in a few years.
Let’s explore some of the high-cost aspects of this updated GOP tax plan.
Personal income tax rates stay unchanged
The tax law from 2017, which lowered multiple individual income tax rates, will continue under current regulations.
As it stands, marginal rates are 10%, 12%, 22%, 24%, 32%, 35%, and 37%. The new GOP proposal will keep these rates in place.
According to the Joint Committee on Taxation, these extensions will lead to a reduction in federal revenues to about $2.034 trillion.
If allowed to expire, the rates would change to 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. The original 2017 cuts preserved only the 10% and 35% rates.
Recently, Trump reconsidered a plan to raise the highest tax rate from 37% back to 39.6%, partly to address the $3.8 trillion cost associated with the tax segment of the bill, but he seems to have moved away from that idea.
Standard deductions and the elimination of personal exemptions continue
This legislation will sustain the higher standard deduction, nearly doubled in 2017, for a limited period. It’s set to increase by $1,000 for individuals and $2,000 for married couples, lasting four years.
The removal of the personal exemption will simplify tax filing for many. For 2024, the standard deduction is $14,600 for individuals and $29,200 for couples.
This higher deduction is expected to reduce revenues by approximately $1.3 trillion by 2034, while eliminating personal exemptions is projected to increase federal revenues by $1.9 trillion, creating a net gain.
Exemptions for tips and overtime pay
The bill introduces a complete, temporary deduction for overtime payments and tips, shielding taxpayers from taxes on these earnings. This combination is estimated to reduce revenues by around $164 billion until it expires in 2028.
Professionals in the restaurant sector express fears that these changes could dissuade customers from tipping adequately, as tip amounts would be seen as voluntary rather than part of the employees’ wages.
A bartender in New York City, wishing to remain anonymous, mentioned concerns about how these tax changes might create rifts between waitstaff and kitchen staff regarding income.
Tax specialists warn that the IRS’s interpretation of this law could complicate paperwork for both employers and employees, depending on how regulations are updated.
Tax breaks for seniors
An additional tax benefit of $4,000 is available for seniors below a certain income level, adding to the existing $15,000 standard deduction and the $2,000 seniors’ deduction already in place.
Trump previously pledged to eliminate taxes on Social Security, which are funded through payroll taxes, and this current initiative closely resembles that promise yet remains fundamentally different. According to Congressional guidelines, changes to the Social Security program can’t be included in budget negotiations intended to streamline the process and avoid democratic filibusters in the Senate.
Salt Cap Discussions
Republicans are still hashing out the state and local tax (SALT) deduction caps, a contentious aspect of the tax proposal. Earlier plans from the Ways and Means Committee suggested raising the cap to $30,000, but that faced pushback.
Late Tuesday, a new proposal surfaced to increase the SALT cap to $40,000, with gradual increments over a decade. Regardless of the final agreement, it’s poised to be costly, with estimates suggesting a $1 trillion price tag over ten years for repealing the cap.
The SALT cap interacts with other parts of the tax structure, including higher standard deductions and the ongoing phase-out of the alternative minimum tax.
Howard Greckman pointed out that even in high-tax areas like New York, the combination of abolishing the $10,000 SALT cap and the AMT changes still benefits taxpayers significantly. “It was a big deal for people,” he noted.
