President Trump signed the Tax Cuts and Job Acts on December 22, 2017. It slashes the corporate tax rate originally from 35 percent and down to 21 percent the minute 2018 starts. In other words, the highest individual tax rate is now 37 percent and it also cuts the rates of the income tax, eliminates personal exemption and then doubles the standard deduction. Corporate cuts are usually permanent whereas the changes in individual cuts end by 2025. In a nutshell, here is how this new Act changes deductions for elder and child care, business taxes and income taxes.
Income Taxes
* The Act retains the seven income tax brackets. The only difference is that the tax rates are lower. Employees will eventually see these changes reflected in their February 2018 paychecks. The income levels rise every year because of inflation. However, they increase slower compared to the past because the Act is resorting to the “chained consumer price index.” This will eventually move people to higher tax brackets.
* The new Act doubles the standard deduction. Those who are single filers increases the deduction from $6,350 and to $12,000. Those who are Married and also Joint Filers find their tax increasing from $12,700 and reaching $24,000. This means that the over-all 94% of taxpayers get the standard deduction. The National Association of Realtor and National Association of Home Builders are against this. When taxpayers take the standard deduction, only a handful of them would make the most out of the mortgage interest deduction.
* This can lower housing prices. This is why people are now concerned about the real estate market. They think it is currently trapped in a bubble that could burst anytime, therefore resulting in another collapse.
* It eliminates personal exemptions. Before President Trump signed the act, taxpayers are deducted $4,150 from their income every time they claim one dependent. This then results in families with multiple children paying higher taxes regardless of the increased standard deduction that the new Act has imposed.
*It eliminates itemized deductions. This covers moving expenses. Only members of the military are exempted from this. This means that individuals paying alimony are no longer deducted for this, whereas those receiving the alimony can. This begins in 2019 for couples that signed the divorce in 2018.
*The new tax code retains the deduction for retirement savings, student loan and charitable contributions.
*It limits the deduction on the mortgage interest for every $750,000. Deductions can no longer be applied to the interest of home equity. Those who currently have a mortgage are not affected by this.
Those who pay taxes can subtract to a total of $10,000 on local and state taxes. They have to choose whether the taxes will be on the property taxes, sales taxes or income. Taxpayers in California and New York, both high tax states, are in the losing end here.
The New Act Regarding Medical Expenses
The Act expands the deduction for 2017 and 2018 medical expenses. It lets the taxpayers deduct their medical expenses that range around 7.5 percent and even more of their income. Before this bill, the cutoff for medical expenses was 10 percent for insured individuals who were born after 1952. Obviously, seniors already receive the 7.5 percent cutoff. Statistics show that around 8.8 million people have already used this deduction in 2015.
The Act also repeals the much-discussed Obamacare tax for individuals who do not have health insurance in 2019. Without this mandate, the Congressional Budget Office predicts that around 13 million people will discontinue their plans. Therefore, the government would eventually then be able to save around $338 billion because there is no need to pay for the subsidies. The downside to this is that the costs of health care will increase. This is because fewer people get the preventive care required and needed in order to avoid those unexpected visits to the emergency room. Maine Representative Senator Susan Collins approved this bill because the President promised to reinstate the subsidies to the insurers. This is outlined in the Murray-Alexander bill.
The overall subsidies of $7 billion are reimbursed through lowering the costs for Americans who are within the low-income range. However, the CBO has stated that it will not offset the health care prices that are higher in value and were created by the repealed mandate.
This Act also doubles the exemption of the estate tax down to $11.2 million for the single taxpayers and around $22.4 million for those who filed as couples. This benefits those who are in the top 1 percent of that group. These higher 4,918 tax returns have a total contribution of $17 billion in their taxes. The exemption also reverts the pre-Act levels in the year 2026.
It maintains the Alternative Minimum Tax. It increases the exemption from the amount of $54,300 to $70,300 for the singles and as for those who filed a joint, this ranges from the amount of $84,500 to $109,400. As for the exemptions, the phase-out is at the amount of $500,000 for the single taxpayers and $1 million for those who filed as joint. This exemption also reverts to the Act levels of the year 2026.
Elder and Child Care
As for the Child Tax Credit, the Act raises it from the amount of $1,000 to $2,000. For parents who do not earn enough in order to pay the taxes, they can claim credit as much as $1,400. It also increases the income level at $110,000 to $400,000 for tax filers who are married.
This lets the parents use the 529 savings plans to pay for the tuition in private schools, as well as religious schools with the K-12 program. They can also resort to these funds to pay for the expenses that are acquired when children are home-schooled.
Every non-child dependent is given $500 credit. This assists the family in caring for their elderly parents.
Taxes on Businesses
The New Act decreases the maximum tax rate of corporations from 35 percent down to 21 percent. This is the lowest that it has been since the year 1939. For the longest time, the United States is included in the list of countries with the highest rates around the world. A number of corporations do not pay that much. Therefore, on average, the reasonable and effective rate is around 18 percent. Large corporations employ tax attorneys who assist them in coming up with ways so that they do not have to pay more.
This then raises the standard deduction to the amount of 20 percent for businesses that are referred to as “pass-through.” This deduction is said to end after the year 2025. Those considered to be pass-through businesses are sole proprietorships, S corporations, limited liability companies, and partnerships. They also cover hedge funds, real estate companies along with private equity funds. The deductions are then phased out for the service professionals who reach the income amount of $157,500 for singles and as for joint filers, it’s around $315,000.
This New Act sets limitations to the corporations’ ability to deduct the interest expense down to 30 percent of the overall income. Within four years, the income is based on the EBITDA but this also reverts the earnings before the taxes and the interests. This makes it more expensive for financial firms to borrow some money. The companies will also have fewer opportunities to issue the bonds and buy their stock back. Stock prices may fall. This limit generates the revenue to also pay for the other tax breaks.
It lets the businesses also deduct the overall costs of the assets that are considered to be depreciable and have this done in one year as opposed to amortizing these through several years. This, however, does not apply to the structures. To qualify, the equipment can be purchased between September 27, 2017 and January 1, 2023.
The New Act also requires the requirements to be stiffened especially on profits that carry interests. Carried interests are usually taxed at the rate of 23.8 percent as opposed to 39.6 percent. The firms are then required to hold these assets for the duration of a year so that they can qualify within the lower rate. The Act also extends this requirement to last up to three years. This may not benefit the hedge funds that have the tendency to continuously trade. It would also not affect private equity funds that are within the assets of five years. This change in taxes could increase the revenue to $1.2 billion.
It also eliminates the corporate AMT. This had a tax rate of 20% that kicked in if the tax credits pushed the effective tax rate of the firm right below that specified level. Under the AMT, these companies do not have the ability to deduct the spending budget for research and development as well as the total investments, especially in a low-income neighborhood. By eliminating the corporate AMT, it adds a total of $40 billion to the overall deficit.
The New Bill also advocates the change from the “worldwide” tax system that is currently operating and turn it into a territorial system. Under this, multinationals receive taxes based on the foreign income that they have earned. They also do not have to pay the tax unless the profits are brought home. This results in corporations basing their businesses overseas. When it is set in a territorial system, these businesses are not taxed on the profit that they earned on foreign soil. There are more chances that they will invest this within the United States. This benefits the pharmaceutical as well as the high tech companies, most of all.
It lets the companies repatriate the overall $2.6 trillion that they hold in stockpiles. They only have to pay the tax rate that is usually 15.5 percent once and also 8 percent for the equipment. This repatriation could also raise the yields of the Treasury note. The corporations that hold the most of the cash in the treasury notes usually sell them because the supply that are in excess often send the yields on a higher basis.
Other Benefits of the New Tax Bill
* It lets the oil drilling within the Arctic National Wildlife Refuge. It is estimated to increase this by $1.1 billion in total revenue over a period of 10 years. When drilling this, it may not appear profitable unless it gains $70 per barrel.
* It retains the tax credits for the wind farms and the electric vehicles.
* It also cuts the deduction for the drug research targeted on orphans from 50% and to half which is 25%.
* There are cuts on the taxes of liquor, beer, and wine. The Brooking Institute has an estimation that amounts to 1,550 more deaths that are related to alcohol. The studies also discovered that if the alcohol prices are lowered then there are more purchases of this product and therefore results in death tolls being higher.
How It Affects Taxpayers and Individuals
This new tax plan assists businesses, and not individuals. The tax cuts on businesses are permanent whereas the individual cuts have an expiration, and this is 2025. However, the largest private employer in the country, Walmart, has released a statement that they will increase the wages of their employees. They will also use this additional money that they have saved from the tax cuts to divide it in the form of bonuses and then also increase the benefits.
As for individuals, the clear winners are the higher-income families. Those who are within the 20-80 percent of the income range receives a 1.7% increase in their income after tax. Those who are in the 95 to 99 percentile will benefit an increase of 2.2%.
The Tax Policy Center also estimates that the ones in the lowest-earning percentile would see their income at a rate of 0.4% higher. As for those who are in the next highest percentile, they are expected to receive a 1.2 percentage boost. Those in the next two quintiles can see their income rise by 1.6 to 1.9 percent. The biggest increase goes to those who are earning the most.
