How Will Trump's Proposed Tax Changes Affect Single Parents?

Changes Affect Filing Status and Eliminate Personal Exemptions

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2016 was a political hotbed of a year that still has a lot of Americans wondering about the country’s path going forward. President Trump said a lot during his campaign about what he’d like to do for America, and some of his proposed plans concern taxation. Some of the changes he’d like to make are substantial.

Here’s a breakdown of President Trump’s tax plan and the effect it could potentially have on one of America’s largest demographics — single parents.

Tax Brackets Will Change

There are seven federal tax brackets as we begin 2017, ranging from 10 percent for those earning less than $9,325 up to 39.6 percent for those with incomes in excess of $418,400. Loosely defined, your tax bracket is the percentage of your income that you must give to Uncle Sam at tax time.

Needless to say, most of us fall in the middle somewhere, but that could be about to change. President Trump proposes cutting this system to just three tax brackets at 12, 25 and 33 percent.

Opponents say this could theoretically raise taxes, particularly for those who qualify for head of household filing status — and many single parents do. Among other more complex rules, qualifying as head of household means being unmarried or not living with your spouse during the last six months of the tax year, having at least one dependent, and paying for the majority of the upkeep of your home. A good many American parents fall into this category.

If you qualify as head of household, you can earn more before moving into the next highest tax bracket. For example, if you earn more than $9,325 under the existing tax code, any income over this amount would be subject to taxation at 15 percent for single filers. If you’re head of household, however, you can earn up to $13,250 in the 2016 tax year before moving into the 15 percent tax bracket. That can be very helpful for a single parent who’s supporting her household on her own.

About the Head of Household Filing Status…

Unfortunately, President Trump’s tax plan proposes eliminating the head of household filing status. This would result in single parents paying the same single tax rate as an unmarried 20-something living at home with Mom and Dad and no dependents.

As things stand at the beginning of 2017, you’ll pay 10 percent in taxes if you’re a single parent earning $13,000. If and when the head of household filing status is eliminated, and in conjunction with the new tax brackets, that same parent earning $13,000 a year will face a 2 percent increase, falling into the new minimum 12-percent bracket.

A significant number of single taxpayers would pay 25 percent under President Trump’s proposed scale on incomes that fall between $37,500 and $112,500. Then, at incomes over $112,500, they would move into the new 33 percent tax bracket. Under the existing tax code, a single filer would not move into the 33 percent tax bracket until he earned more than $190,150 — a walloping $77,650 difference. A head of household filer can earn up to $210,800 before moving into the 33 percent bracket — but the head of household filing status will no longer exist.

Taking extremes out of it, a single parent getting by on $40,000 a year pays 15 percent in taxes in the 2016 tax year. She’d fall into a 25 percent tax bracket under President Trump’s plan.

No More Personal Exemptions

Tax brackets don’t exist in a vacuum. Your deductions and exemptions help to determine your taxable income. They subtract from your overall earnings and your tax bracket is then based on the remaining balance.

Each taxpayer is entitled to claim a $4,050 personal exemption for himself and each of his dependents for the 2016 tax year, so a single parent supporting two children can shave $12,150 off her earnings to arrive at her taxable income and before determining her tax bracket: $4,050 times three. So if the personal exemption is eliminated and no other changes were made, she would pay taxes on $12,150 more in income.

Increased Standard Deductions

That’s the bad news. Fortunately, other changes are afoot.

President Trump also proposes raising the standard deduction available to all taxpayers, and this would balance the above changes, at least to some extent. Single filers preparing their 2016 tax returns can take a standard deduction of $6,300 if they choose not to itemize their deductions. President Trump would increase this to $15,000, a difference of $8,700.

This would take some of the sting out of losing those personal exemptions. The taxable income of that single parent with two kids would not actually increase by $12,150 but only by $3,450: the hike of $12,150 less the additional $8,700 she’d gain on the standard deduction. It’s still an increase, but we’re not done yet. 

The New Child Care Deduction

President Trump also proposes a tax change that would affect one of a single parent’s greatest expenses — child care while she goes out to earn the income she’s going to be taxed on. He suggests a tax deduction that would allow all working parents, whether married or single, to subtract from their incomes the costs of child care annually for up to four kids age 13. 

This is an above-the-line deduction so it would lower a taxpayer’s adjusted gross income, that which she’s taxed upon before claiming the standard deduction and any tax credits she might be eligible for. It's an important factor because several tax breaks, credits and deductions phase out at higher AGIs, making some taxpayers no longer be eligible for them because they earn too much.

Of course, this doesn’t necessarily mean that parents can send their young ones to the most expensive daycare in the area. The child care deduction cannot exceed the average cost of daycare in the parents’ state of residence. Still, the qualifying rules for the current child and dependent care tax credit are much more exacting, preventing many parents from claiming it. This child care deduction would be available to all single parents unless they earn more than $250,000 annually. Married parents can earn up to $500,000 a year.

And some low-income parents will be able to claim the additional tax credit for child care as well.

The Bottom Line

As with all proposals, the devil is in the details, and the details of President Trump’s tax plan have yet to be ironed out in the early months of 2017. Some single parents might find themselves better off. Others may be hurt. A lot might think this is all a lot of hullaballoo about nothing because their tax bills won’t change much. Some positive changes may balance the potential impact of the negative ones.

But there’s no guarantee that Congress will pass Trump’s tax plan in its entirety. Single parents’ tax burdens hinge on the interlocking components of these four aspects of the new administration’s plan.