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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?

CNBC.com 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.

What is Tax Policy?

 

The purpose of taxation is to raise money for our government. When designing our tax system Adam Smith resolved certain principles as guidance: Smith required our tax system to be equal (in proportion to each person’s share of the tax base), certain (so people knew exactly how much they owe), convenient (so the tax assessments arose as the taxpayer’s received the income), and efficient (a low cost of collection leaving the largest portion possible for government spending needs).

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Similarly, the 1995 Joint Committee on Taxation refined these elements by asking:

1) Does the tax system hinder or promote economic efficiency?

2) Is the tax system fair?

3) Does the tax system treat similarly situated people equally?

4) Can people compute their taxable incomes and file their tax returns?

5) Can the tax system be easily administered at a low cost?

6) Does the tax system afford due process to all taxpayers so taxpayers have the ability to object to arbitrary and capricious application of tax laws?

Today, the public and tax experts alike cry for tax reformation because the current system stifles economic growth preventing the economy from prospering.[1] The Heritage Foundation claims the current tax system, with double taxation on business income, savings, and investment, is biased, reduces incentive, discourages entrepreneurial risk taking, and is full of politically motivated credits, deductions, and exemptions.[2] As an example, the Heritage Foundation points to the myriad of tax breaks for production and consumption of politically favored energy products, and the fact that the United States imposes the highest corporate tax rate of any country among the OECD (the 34 most industrialized countries in the world).[3] Further, the US tax system is the only system taxing companies on their earnings world-wide (as opposed to only taxing their domestic income) creating incentive for US businesses to merge with foreign companies and move investment and production offshore.[4] Such mergers shrink the US economy and exports jobs and capital abroad.

Tax experts Curtis Dubay and David Burton adds economic theory to the elements of tax policy with the following principles: 1) raise the least revenue required to fund constitutionally appropriate government activities, 2) apply lower rates to a broader base, 3) do not impose unreasonable burdens to anyone, 4) apply the tax system consistently without special privileges, and 5) minimize interference with free market and free enterprise. Dubay and Burton also argue that the complexity of our current system burdens taxpayers with a high cost of compliance.

The foregoing elements of our tax system are helpful when considering the respective tax policies advanced by Hillary Clinton and Donald Trump together with criticisms of their opponent’s proposals.

[1] See, e.g., The Heritage Foundation, Solutions 2016 Tax Reform.
[2] Id.
[3] Id.
[4] Id.

Clinton and Trump’s Tax Policies: Fact Checking the Fact Checkers

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Are the fact checkers telling us the truth about the Presidential candidates’ statements regarding proposed tax policies?  Examining the details of the so-called fact checking sites making True or Pinocchio claims reveal the “True” and “Pinocchio” designations are themselves cloaked in rhetoric and word play. This layman’s term easy to read article reveals the truth behind our candidates’ tax policies and the fact checking scores reported by the media.

Tax policy is a hot 2016 election topic because of the economic strife plaguing American families for almost 20 years. Liberals typically propose higher taxes blaming the wealthy for the struggles of the poor. The liberal tax mantra claims higher taxes on the “billionaire class” will fund bigger government spending packages to help the poorer families gain education, health care, and other benefits that ultimately serve to bridge the income inequality gap. Conservatives typically propose lower taxes arguing that allowing people to keep more of their own hard earned money promotes market efficiency, shrinks the government influence over American citizens resulting in greater freedoms, and promotes individual savings and business investment that generates jobs, increases our nation’s gross domestic product, and strengthens the American economy.

trump-2Of course the liberals claim lower taxes are a tool for increasing the income inequality because the wealthy, keeping more if its hard earned money, become more wealthy and ultimately increases the inequality of wealth in America. Instead, making the billionaire class pay more leaves them with plenty while funding government programs making sure poorer families have food, housing, and opportunity for advancement through education. It is hard to argue the merit of such a plan if this were the case. However, conservatives argue that the liberal spending packages irresponsibly waste money by helping big business with side deals, giving billions to countries that hate America, and funding social programs that are abused resulting in the perpetuation of inner city problems instead of curing them. Can these views be reconciled?

 

 

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Whitney’s Tax Files: Small Estate Affidavits

In this edition of Whitney’s Tax Files, Whitney explains how to use Small Estate Affidavits to bypass probate, saving you time and money.

Hi, I’m Whitney Sorrell with the Sorrell Law Firm in Scottsdale, Arizona, and you’re watching Whitney’s Tax Files. Today’s question comes from a client who’s asking whether they can avoid probate with the use of small estate affidavits.

Now small estate affidavits come in two varieties. The first is a personal property affidavit. A personal property affidavit would be effective if the total value of all the personal property in the estate does not exceed $75,000.00 USD. There’s also a real property affidavit. A real property affidavit is effective if the value of all the real property in the estate does not exceed $100,000.00 USD.

Now when we’re looking at the value of the property, we’re looking at the net value, the net equity. So you’re going to look at the fair market value minus any mortgages or leans filed and recorded against that property, and that’s going to give your net equity. For a real property affidavit to be effective you have to bring it to court and have the court approve it.

Once approved, you’re going to record that real property affidavit together with a certified death certificate, and that would be effective to transfer the property. The personal property affidavit does not need court approval. You can just execute the personal property affidavit and deliver it to the person holding the property, and they give you the property.

So those are the methods of avoiding a probate for a small estate. If you have any questions or if you need any help with this type of a matter, please give us a call at 480-776-6055. When you call mention that you saw us on Whitney’s Tax Files..

 

Whitney’s Tax Files: Taking title to real property.

Title to Real Property

What are the different methods, and what’s the difference between the different methods of taking title to real property?” “Should we take title as tenants in common, as joint tenants, or as community property with rights of survivorship?”

Tenants in common is where two people own a undivided interest in their property. If two people come together, they each own a 50 percent undivided interest as tenants in common. Joint tenants is similar to tenants in common, but if one person were to die, the joint tenants has what’s called rights of survivorship. The joint tenant would then own the entire piece of property, whereas in tenants in common, if one person dies, that person’s will or trust would say where that person’s half of interest goes.

Now community property with rights of survivorship is similar to joint tenants, except this would be between husband and wife only, and in the community property estate. Now the reason why you’d want to own something as community property with rights of survivorship instead of as joint tenants is because there are tax advantages. It’s called a double step up in basis. We can talk about that another time, but there are tax advantages afforded only to married couples for having property title in this way. Thanks for tuning in to Whitney’s Tax Files.

 

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