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WHAT IMPACT WILL THE “TAX CUTS AND JOBS ACT” HAVE ON INDIVIDUALS AND BUSINESSES?

By November 13, 2017 No Comments

The 429-page GOP tax plan called the “Tax Cuts and Jobs Act amends the 1986 Tax Reform Act and proposes many significant changes to the tax code. The Trump tax team, includes the following individuals:

  • House Speaker Paul Ryan
  • Senate Majority Leader Mitch McConnell
  • National Economic Council Director Gary Cohn
  • Treasure Secretary Steven Mnuchin
  • Senate Finance Committee Chairman Orrin Hatch
  • House Ways and Means Committee Chairman Kevin Brady

They have proposed changes that would reform both individual income taxes and corporate income taxes and would move the United States to a territorial system of business taxation.

According to the Tax Foundation’s Taxes and Growth Model, these changes would lower the marginal tax rates and cost of capital which could lead to 3.9 percent higher GDP over the long term, 3.1 percent higher wages, and an additional 975,000 full-time equivalent jobs. Others complain that the changes could cost nearly $1 trillion in tax revenue over the next decade. Here are some of the most significant proposed changes:

Changes to Individuals

  • Reduce the seven tax brackets to four, with rates of 12 percent, 25 percent, 35 percent, and 39.6 percent
  • Taxpayers who itemize deductions will be able to deduct $12,200 compared to the current combined deduction of $10,400
  • Joint filers would deduct $24,400 instead of the current $20,800
  • Tax plan would end or limit many deductions which could increase federal taxes for Americans who itemize their deductions
  • Increases standard deduction from $6,350 to $12,200 for singles, from $12,700 to $24,400 for married couples filing jointly, and from $9,350 to $18,300 for heads of household.
  • Eliminates personal exemption.
  • Creates a $300 personal credit, along with a $300 non-child dependent personal credit, in place for 5 years.
  • Increases the child tax credit to $1,600 with $1,000 of the tax credit initially refundable, indexed to inflation.
  • Increases the phaseout threshold for the child tax credit: for married households, it rises from $110,000 to $230,000.
  • Retains the mortgage interest deduction, but with a cap of $500,000 of principal on newly-purchased homes.
  • Retains charitable contribution deductions.
  • Retains deduction for state and local property taxes, but caps the latter at $10,000.
  • Eliminates the remainder of state and local tax deductions along with other itemized deductions.
  • Eliminates the individual alternative minimum tax.
  • Eliminates federal estate taxes.
  • Indexes tax brackets and other components using the chained CPI measure of inflation.

Tax Brackets for Ordinary Income Under Current Law and the Tax Cuts and Jobs Act

Current Tax Brackets   Single Tax Filers
10% > $0 12% > $0
15% > $9,525
25% > $38,700 25% > $45,000
28% > $93,700
33% > $191,450
35% > $424,950 35% > $200,000
39.6% > $426,700 39.6% > $500,000
Note: Tax brackets are for single tax filers. Brackets differ for married and head of household filers.

 

Certified Financial Planner and nationally recognized New York financial expert Lauren Lyons Cole estimated the following:

Family of four with 2 children under 17 $25,000 household income Current Tax System Amended Tax System 2018
Standard deduction $12,700 $24,400
Personal exemptions $16,200
Taxable income -$3,900 $600
Approximate federal taxes owed $0 $72
Earned income tax credit (refundable) $5,310 $5,310
Child tax credit (refundable amount) $2,000 $2,000
Family tax credit (refundable amount) $0
Total federal taxes refunded $7,310 $7,238
Potential federal tax savings -$72

 

Family of four with 2 children under 17 $75,000 household income Current Tax System Amended Tax System 2018
Standard deduction $12,700 $24,400
Personal exemptions $16,200
Taxable income $46,100 $50,600
Approximate federal taxes owed $5,983 $6,072
Earned income tax credit (refundable)
Child tax credit (refundable amount) $2,000 $3,200
Family tax credit (refundable amount) $600
Total federal taxes owed $3,983 $2,272
Potential federal tax savings $1,711

 

Family of four with 2 children under 17 $175,000 household income Current Tax System Amended Tax System 2018
Standard deduction (see note below) $27,053 $24,400
Personal exemptions $16,200
Taxable income $131,747 $150,600
Approximate federal taxes owed $24,414 $25,950
Earned income tax credit (refundable)
Child tax credit (refundable amount) N/A $3,200
Family tax credit (refundable amount) $600
Total federal taxes owed $24,414 $22,150
Potential federal tax savings $2,264
Note: Assumes taxpayer will itemize deductions in 2017. Itemized deduction amount is the average reported in the IRS Statistics of Income Bulletin, Spring 2017. H&R Block 2017 Tax Calculator, 2017 Tax Cuts and Jobs Act

 

Changes to Businesses

  • Lowers the corporate tax rate from 35 percent to 20 percent.
  • Eliminates the corporate alternative minimum tax.
  • Passes-through business income at a maximum tax rate of 25 percent, subject to anti-abuse rules.
  • Allows for capital investment, except for structures, to be fully and immediately deductible for 5 years.
  • Increases the Section 179 expensing limit from $500,000 to $5 million, with an increased phaseout threshold.
  • Limits deductibility of net interest expense on future loans to 30 percent of earnings before interest, taxes, depreciation, and amortization for all businesses with gross receipts of $25 million or more.
  • Restricts deduction on net operating losses to 90 percent of net taxable income and allows net operating losses to be carried forward indefinitely, increased by a factor reflecting inflation and the real return to capital.
  • Eliminates net operating loss carrybacks.
  • Creates a territorial tax system, exempting from U.S. tax 100 percent of dividends from foreign subsidiaries.
  • Enacts a deemed repatriation of currently deferred foreign profits at a rate of 12 percent for cash and cash-equivalent profits and 5 percent of all other profits.
  • Limits deduction for net interest paid to 30 percent of a company’s earnings before interest, taxes, depreciation, and amortization (EBITDA).
  • Repeals multiple business deductions and credits for entertainment, domestic production activities (Section 199), net market tax credit, and orphan drug credit.
  • Eliminates other business credits and deductions.

Over the next few months, it will be interesting to see how many of these changes get implemented into law. If these changes are adopted it is likely to have a positive impact on middle income Americans and a dramatic positive impact of businesses, jobs and the economy. It will also require some significant belt-tightening in Washington D.C. to avoid amassing additional debt that the country can ill afford.