How the new administration will impact you
With President-elect Donald J. Trump poised to take office as America’s 45th president tomorrow, what impact will the new administration have on you and your finances? Let’s look at some of the strategies that the president-elect advocated throughout his campaign and their potential impact on personal taxes, investments and job growth.
A simplified personal tax plan
To provide relief on personal income taxes, President-elect Trump plans to reduce the number of income tax brackets, increase the amount of the standard deduction and cap deductions for those taxpayers who choose to itemize. The changes will mean that many taxpayers will have no need to itemize, making it easier for them to file returns. Here’s a topline look at the specific elements of the proposed tax plan:
Only three tax brackets
According to his official website, President-elect Trump plans to reduce personal income taxes, collapsing the current seven tax brackets down to three.
While current tax brackets range from 10 percent to 39.6 percent, under the proposal, the new tax rates for married-joint* filers would be:
- 12 percent for those who earn less than $75,000
- 25 percent for those who earn more than $75,000 but less than $225,000
- 33 percent for those who earn more than $225,000
Note: Brackets for single filers would be half of these amounts
The preferential rates given to other income such as dividends (money paid regularly by an organization to its shareholders out of its profits or reserves) and capital gains (profit from the sale of property or investments), would be aligned to the new brackets.
Standard deduction increases
In addition to reducing the number of tax brackets, the proposed tax plan also includes changes to taxpayer deductions and exemptions.
For example, the proposed tax plan changes increase the standard deduction (the dollar amount non-itemizers may deduct from their taxes):
- For joint filers, the standard deduction will increase from $12,600 to $30,000
- For single filers, it will increase from $6,300 to $15,000.
For those taxpayers who do itemize, the tax plan calls for capping itemized deductions at $200,000 for married-joint filers or $100,000 for single filers. Mortgage interest may be one of the items included in the cap. According to the Tax Policy Center, 22.5 percent of the 173 million households in the U.S. benefit from the mortgage interest deduction. But, as CNBC reported, caps in the proposed plan will most likely not affect the majority of homeowners since their mortgage interest payments would not reach the cap amount, even when combined with other deductions such as medical expenses or charitable deductions.
Along with the proposed changes to standard and itemized deductions, personal exemptions (the deductions every taxpayer can currently claim for themselves and their dependents) would be eliminated. For the 2016 tax year, the current personal exemption is $4,050 per person, which allows you to deduct that amount from your income for every taxpayer and dependent you claim on your tax return.
The president-elect’s tax plan also tackles the cost of childcare by allowing working parents (with a total income under $500,000 married-joint or $250,000 single) to deduct the average cost of childcare expenses for up to four children or elderly dependents. Under the plan, stay-at-home parents would also receive the same deduction as working parents. Childcare deductions will be an “above the line” deduction, one taxpayers can take without itemizing.
In addition, the Trump tax plan would offer childcare spending rebates to lower-income taxpayers through the existing Earned Income Tax Credit (EITC) that could mean almost $1,200 per year per eligible family. Finally, new Dependent Care Savings Accounts (DCSAs) which could be used to set aside up to $2,000 for child care, after-school enrichment programs and private school tuition as well as in-home nursing and long-term care for elder dependents. Unlike current Dependent Care Flexible Savings Accounts (DFSAs) that are only available through employers, the new plans would be open to everyone in the U.S. and would allow balances to accumulate, rather than expire annually.
How a Trump presidency could affect your investments
What does the future hold for your 401(k) and other investments under the president elect’s plan? While past performance does not predict future results, the market has been bullish since Trump’s election. After a quick drop of 900 points on election night, the Dow Jones Industrial Average (Dow) rose rapidly in the weeks since the election and continues to close in on a pivotal milestone of 20,000 points.
For the individual investor, Sally Sargent, MB Financial’s Senior Managing Director of Wealth Management, offers this advice, “We suggest our clients remain confident and take the long view. As the new administration takes office, it’s a great opportunity for investors to review their portfolios and rebalance where necessary. Making sure your portfolio is diversified lets you sleep at night, knowing you are well positioned, regardless of how the market performs.”
Job growth and the economy
For Americans across the country, the availability of jobs is one of the most crucial indicators of the strength of the economy, providing not only individual financial security, but also more disposable income. In December 2016, the unemployment rate rose one-tenth of one percent to 4.7 percent. Going forward, President-elect Trump plans to ramp up economic growth through sweeping reforms in tax, trade, energy and regulatory policies.
His economic plan projects 3.5 percent growth per year on average. For each 1 percent in added Gross Domestic Product (GDP) growth, President-elect Trump’s economic advisors project that the economy will add 1.2 million jobs, for an increase of 25 million new jobs over the next decade. For example, in an article in the Washington Post, Trump economic advisor Stephen Moore said that to reach those goals, the president-elect will focus on an America-first, pro-business approach, using changes in his tax plan, a new energy policy and pealing back regulation to energize economic growth.
Since Congressional approval is a requirement for policies President-elect Trump may implement, it’s important to let the dust settle as the new administration launches into its first 100 days. This is a good time to review your savings needs and how you plan to meet those needs rather than a time to make changes to your personal financial strategies based on what policy changes might be enacted.