As of this week, the House and Senate leaders have reconciled their two versions of the Tax Cuts & Job Act. This is the biggest change to the tax code in over three decades. The plan has been controversial since its inception, with analysts suggesting (and the data showing) that the benefits are heavily skewed towards corporations and the wealthy.  

How will these changes impact you?

Impact on You & Your Family

Here’s a list of some of the bill’s primary features:

  • Lowering income tax rates. The house and senate both offer a reduction in tax rates in some of the brackets, but they differ insofar as the House plan reduces the number of brackets from seven to four, while the Senate plan keeps the current seven brackets.
  • Doubling the standard deduction. The standard deduction is currently $6,350 for single and $12,700 if married filing jointly.
  • Eliminating personal exemptions. Exemptions are currently at $4,050 for the individual, and a spouse and dependents can be claimed at this same rate.
  • Expanding state and local tax deductions. These deductions would go beyond just property taxes, to include income tax, which is capped at $10,000.
  • Doubling the estate tax exemption. This is currently $5.49 million for singles and $11.2m for couples.
  • Repealing the Affordable Care Act individual mandate to have health insurance. This would result in even lower participation, and likely higher premiums.
  • Increasing the Child Tax Credits. These are currently $1,000.
  • Maintaining the Alternative Minimum Tax for individuals and families.

Both the House and Senate plans eliminate many itemized deductions, except for the following:

  • Charitable contributions
  • Student loan interest deductions
  • Medical expense deductions (which will be expanded)
  • Property taxes
  • Mortgage interest deduction (but the threshold will be reduced)
  • Retirement savings contributions
  • Adoption tax credit
  • And a few other ancillary deductions

Impact on Businesses

The corporations are clearly the biggest winners in the deal. The bill will:

  • Reduce the corporate tax rate from 37% to 21%.
  • Eliminate the corporate Alternative Minimum Tax (AMT).

For small businesses, the bill raises the standard deduction to 20% for pass-through businesses, which include sole proprietorships, partnerships, limited liability companies, and S corporations. 

The Real Impact

The following excerpt is taken from an article on The Balance titled Trump’s Tax Plan and How It Would Affect You.* This will give perspective on the who the bill will help, which is primarily large corporations and higher income families.  

“Among individuals, it would help higher income families the most. Everyone gets a tax cut in 2019. But in 2021, taxes will increase on those making $30,000 or less. That’s because the deductions and credits they lose won’t make up for the lower tax rate. By 2023, costs will rise on everyone who makes less than $40,000 a year. The tax cuts expire in 2025. As a result, all income levels will pay higher taxes in 2027. That’s according to the most recent analysis of the Senate plan by the Joint Committee on Taxation.

“The Tax Policy Center (TPC) found that taxpayers earning in the top 1 percent would receive a larger percent tax cut than those in lower income levels. By 2027, those in the lowest 20 percent would pay higher taxes.

“Both the Senate and House plan increase the deficit by almost $1.5 trillion over the next 10 years. The Joint Committee on Taxation reported that the bill would add $1 trillion even after including the tax cut’s impact on economic growth. It wouldn’t spur growth enough to offset the cuts’ loss in revenue.”

A higher deficit will most certainly lead to higher inflation, which isn’t good for anyone. And the massive tax cuts will need to be offset by spending cuts. “The increases to the debt could trigger automatic cuts in Medicare, by up to $25 billion in 2018. In total, it would result in mandatory programs by $150 billion over the next 10 years.”

Next steps before sending the bill to Trump to sign include sending the draft to the Joint Committee on Taxation for review. Next week, the draft will go to each house of Congress for a vote. There is still a question as to whether the bill will get the votes needed, but if passed, many of these tax cuts would go into effect in January.

Join Us to Learn More

Eric Moore, with E.W. Moore Accounting, will be speaking on these tax law changes on Wednesday, January 22 at our office.  Alexis Advisors will also provide our view of the markets for 2018.