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 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, 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.
Whitney Sorrell is a tax attorney who helps his clients with estate planning, sophisticated tax structures and business formation. He is a former IRS Agent and CPA.