President Donald Trump and congressional Republicans unveiled the first major revamp of the nation's tax code in a generation Wednesday — a sweeping, nearly $6 trillion tax cut that would deeply reduce levies for corporations, simplify everyone's brackets and nearly double the standard deduction used by most Americans.
As debates about corporate rates, the "death tax" and winners and losers rage, here are a few key terms to grasp.
The estate tax is the tax individuals pay on an estate inherited after someone has died. Under current law, the first $11 million of an estate is exempt for a married couple, meaning only the wealthiest Americans pay it. Under the blueprint unveiled by Trump, those super-rich would be off the hook.
Trump claimed about the estate tax in his Indiana speech earlier this week, "The farmers in particular are affected.”
That assertion appears to be at odds with statistics. Only 1.7 percent of family-farm estates were required to file an estate-tax return in 2016 and only 0.4 percent ended up owing the tax, according to an analysis by the Agriculture Department. Overall, the very rich are affected in particular.
Individual Tax Rates
The individual tax rate refers to the amount a taxpayer owes in federal income tax based on their income. The U.S. tax code now has seven tax brackets that range from a high of 39.6 percent to a low of 10 percent.
Under Trump’s plan, the individual tax rates would be 12 percent, 25 percent and 35 percent — and the plan recommends a surcharge for the very wealthy. But it doesn't set the income levels at which the rates would apply, so it's unclear just how much change there might be for a typical family or whether its taxes would be reduced.
A standard deduction is a set amount of income that is not subject to tax. Trump's plan would nearly double the standard deduction to $12,000 for individuals and $24,000 for families. This basically would increase the amount of personal income that is tax-free.
Deductions for mortgage interest and charitable giving would remain, but the plan also seeks to end most other itemized deductions that can reduce how much affluent families pay.
Child Tax Credit
The child tax credit is a credit given to parents whose income falls below a certain amount. Parents who qualify for the child tax credit can currently receive a benefit of $1,000 per child.
Trump's proposed plan would call for an increased child tax credit and for opening it to families with higher incomes. Under current law, married couples who file taxes jointly are phased out of the child tax credit if they earn more than $110,000.
Corporate Tax Rate
The corporate tax rate is the rate that corporations pay on their net income.
The U.S. now has a 35 percent corporate tax rate, which is relatively high by international standards, said Joe Rosenberg of the Tax Policy Center.
Under Trump’s plan, corporations would see their top tax rate cut from 35 percent to 20 percent.
President Trump said Thursday that reducing the corporate tax rate to 20 percent is a "non-negotiable" part of his tax plan. Trump said on "Fox & Friends" that he wanted to go lower, but "the numbers really work at 20."
House Speaker Paul Ryan has called a 15 percent rate impractically low and has said it would risk adding to the soaring $20 trillion national debt.
Alternative Minimum Tax
The individual alternative minimum tax is a parallel tax in current law. The AMT has rates of 26 and 28 percent and separate rules that disallow a number of deductions and exemptions.
The AMT was designed to ensure the United State's super rich do not pay a lower rate because of deductions, but in practice it tends to hit taxpayers roughly in the $200,000 to $500,000 range, in particular people in high tax states and in larger families.
The GOP plan would eliminate the individual alternative minimum tax.