President Trump: What Does It Mean For Your Tax Bill?

Donald Trump was elected the 45th President of the United States last night, and while I allow that to sink in for a bit, it’s also worth nothing that Republicans retained control over the House and Senate. As a result, the GOP has unfettered control over the future of tax policy, meaning we may be in for some big changes. What can you expect?

Lower and Fewer Tax Rates; Goodbye Obamacare

Under current law, we pay tax on “ordinary income” — things like wages and interest income — at graduated rates, meaning as income increases, so does the tax rate. There are currently seven rates, stretching from 10% to 39.6%, with the top rate kicking in once income exceeds about $470,000 (if married, $418,000 if single). It looks like so:

Of course, the top rate isn’t really 39.6%, because as part of Obamacare, high-income taxpayers pay an additional 3.8% surtax on “net investment income” — things like interest, rents, royalties, and passive business income — bringing the real top rate to 43.4%.

We don’t pay these rates on all forms of income, however. Certain types of income — namely, qualified dividends and long-term capital gains (the sale of certain assets held longer than one year) — are taxed at preferential rates, which under current law are 15% for most taxpayers, but reach a maximum of 20% for taxpayers in the 39.6% brackets shown above, before tacking on an additional 3.8% for the Obamacare net investment income tax.Donald Trump has proposed cutting the seven brackets down to three: with 12%, 25%, with 33% rates. He would then align the preferential rates afforded dividends and capital gains to the new brackets, while also eliminating the net investment income tax — along with the rest of Obamacare.