A Pointed Review of the Current GOP Tax Plan
There are two parts to the Tax plan: The first part is for Individuals and the second part is for Businesses, mostly corporations. Below highlights the proposed changes in the tax law. All of these changes are prospective, which means that they go into effect in 2018 (filing taxes in 2019).
FOR INDIVIDUAL FILERS
- Continues 7 brackets but lowers all but two rates: the 10% & 35% rates.
2018 rates: 10%, 12%, 22%, 24%, 32%, 35% and 37%.
2017 rates: 10%, 15%, 25%, 28%, 33%, 35% and 39.6%.
Below are the brackets:
- 10% (income up to $9,525 for individuals; up to $19,050 for married couples filing jointly)
- 12% (over $9,525 to $38,700; over $19,050 to $77,400 for couples)
- 22% (over $38,700 to $82,500; over $77,400 to $165,000 for couples)
- 24% (over $82,500 to $157,500; over $165,000 to $315,000 for couples)
- 32% (over $157,500 to $200,000; over $315,000 to $400,000 for couples)
- 35% (over $200,000 to $500,000; over $400,000 to $600,000 for couples)
- 37% (over $500,000; over $600,000 for couples)
|Notice that in the lower brackets, the joint return (mostly for married couples) were double the individual bracket thresholds, eliminating the so-called “marriage penalty.” However starting with the 35% and 37% tax rates, the marriage penalty kicks in after $100,000 earnings by the second spouse over a single taxpayer rate.|
- Nearly doubles the standard deduction: For single filers it increases to: $12,000 from current $6,350; for married couples filing jointly it increases to $24,000 from $12,700. Currently about 70% of filers do not itemize; under the new law it is expected that 90% will not itemize.
- Eliminates personal exemptions: current law allows taxpayers to claim a $4,050 personal exemption for yourself, your spouse and each of your dependents.
- Caps state and local tax deduction at $10,000: The final bill will preserve the state and local tax deduction for anyone who itemizes, but it will cap the amount that may be deducted at $10,000. Today the deduction is unlimited for your state and local property taxes (SALT) plus income or sales taxes. According to the Tax Foundation, residents in the vast majority of counties across the country claim an average SALT deduction below $10,000. The SALT deduction provides greater benefit to higher income households in high-tax states such as Massachusetts. The Pease limitation, a gradual phase-out of itemized deductions as taxpayers reached higher income brackets, has been eliminated.
- Expands child tax credit: The credit would be doubled to $2,000 for children under 17. It also would be made available to high earners because the bill would raise the income threshold under which filers may claim the full credit to $200,000 for single parents, up from $75,000 today; and to $400,000 for married couples, up from $110,000 today. $1,400 of the $2,000 credit is refundable so that taxpayers from low- or middle-income families will be able to receive money refunded to them even if their federal income tax liability nets out to zero.
- Creates temporary credit for non-child dependents: The bill would allow taxpayers to take a $500 credit for each non-child dependent whom they’re supporting, such as a child 17 or older, an ailing elderly parent or an adult child with a disability.
- For mortgages taken out in 2018 after the bill is effective, the interest on a first and/ or second home maximum is lowered from $1 million today to $750,000. Homeowners’ current mortgages are unaffected by the change. The bill eliminates the deduction for the interest on home equity loans which currently has a $100,000 cap.
- Reduces the number of taxpayers who are caught by AMT by raising the income exemption levels to $70,300 for singles, up from $54,300 today; and to $109,400, up from $84,500, for married couples.
- Preserves deductions for medical expenses, student loan interest and classroom supplies bought with a teacher’s own money. It also continues the tax-free status of tuition waivers for graduate students. The medical expense deduction is expanded for 2018 and 2019.
- Doubles the amount of estate value exempt from the estate tax — currently set at $5.49 million for individuals, and $10.98 million for married couples. It is now $10.98 and 21.96 million. It is estimated that only 0.2% of all estates will be subject to the new estate tax floors.
- Slows inflation adjustments in tax code: The bill would use “chained CPI” to measure inflation, which is a slower measure than is used today. With time, deductions, credits and exemptions will decrease in comparison to the amount of income subject to higher rates.
- Eliminates mandate to buy health insurance: There would no longer be a penalty for not buying insurance. It is estimated to save money because it would reduce how much the federal government spends on insurance subsidies and Medicaid.
- The new tax bill retains the old capital gains tax brackets-based on the prior brackets. The 0% capital gains rate will be in place for individuals with $38,600 or less in income ($77,200 for joint filers), and the 15% rate will apply to individuals earning between $38,600 and $452,400 (between $77,400 and $479,000 for joint filers). Above those amounts, capital gains and qualified dividends will be taxed at a 20% rate.
FOR BUSINESSES AND CORPORATIONS
- Pass-through businesses receive 20% deduction (capped for service businesses such as consultants, lawyers, Doctors and financial planners at $157,000 if filing single ($315,000 if married filing joint). The idea was to assist small business owners, partners and shareholders of S-corporations, LLCs and partnerships — who pay their share of the business’ taxes through their individual tax. Lots of tax games will be played to ensure qualification.
- Provision to discourage pass-through entities from re-characterizing income from salary to passive income.
- Slashes corporate rate: The bill cuts the corporate rate to 21% from 35%, starting next year. The bill repeals the alternative minimum tax on corporations.
- Bringing US corporate taxation from worldwide to territorial tax so that income overseas is not ever taxed. This brings the US more in line with taxation schemes of almost all other nations. The bill sets up a one time, low tax rate on existing overseas profits of 15.5% on cash assets and 8% on non-cash assets (e.g., equipment abroad in which profits were invested). The idea is that corporations will bring back to the US money that they have been stashing offshore, up to 2.6 trillion in 2016. If all the money is spent in the US, the stimulus will exceed the 10 year tax burden created by the entire tax bill.