Buzz
On December 22, President Donald Trump presented his 'big, beautiful Christmas present' to the American people when he signed a tax plan into law, promising benefits for both large and small business owners, as well as offering individual taxpayers a small break in 2018.
Although the GOP failed to deliver on their promise of simplifying the tax code—meaning we won’t be filing taxes on a postcard anytime soon, and experts warn that changes to business rates may encourage people to exploit the system—they did alter the tax brackets from seven to...seven and remove several popular deductions.
When the Changes Begin
The new tax plan will begin affecting taxes from January 1, 2018, which means it won’t impact your tax filing in April 2018 (unless you make some last-minute adjustments). Some parts of the plan won’t take effect until 2019 or later.
The tax brackets will change on January 1, 2018, as follows:
The IRS has stated that workers could start noticing the difference in their paychecks as early as February. These new brackets are set to expire after 2025. As Marc Goldwein, Senior Policy Director for the bipartisan Committee for a Responsible Federal Budget, told Vox, “People get eight years of tax reform.”
Starting in 2019, the individual mandate for health insurance will be repealed, meaning that if you don’t purchase health insurance in 2019, you will still face the penalty. The Congressional Budget Office predicts a reduction of 4 million insured people in 2019 and 13 million by 2027 as a result of this change.
Expected Tax Cuts on Average
Republicans are celebrating the legislation as a significant win for the middle class. In the short term, the middle class will benefit: All income groups will receive a tax cut, on average, in 2018, with the Tax Policy Center estimating an average cut of $1,600 in 2018.
How does it work?
Standard deduction: For many individuals, the standard deduction will essentially double: from $6,350 to $12,000 for single filers, and from $12,700 to $24,000 for married couples filing jointly. However, you won’t experience this change until you file your taxes in April 2019.
Child tax credit: A significant benefit for many middle-class families is the increase in the child tax credit, which will now be $2,000 for dependents under 17. $1,400 of this is refundable, meaning if the credit exceeds your tax liability, you can receive up to $1,400 as a refund. Additionally, more higher-income earners will now qualify for this credit. This provision expires in 2025. (You can also reduce your tax burden by up to $500 for other dependents, such as children over 17 or elderly relatives.)
Personal exemptions: Personal exemptions, which used to reduce taxable income, are now eliminated. Previously, you could claim a $4,050 exemption for yourself, your spouse, and your dependents (up to a certain limit). The increase in the standard deduction might offset this loss, but larger families with three or more children may see the benefits reduced or negated entirely.
However, the tax bill largely favors wealthier Americans and business owners. One of the primary criticisms of the plan is that the tax cuts are not distributed evenly across the income scale. Taxpayers earning between $308,000 and $733,000 would see the biggest reductions. According to TCP, middle-income earners (those making between $49,000 and $86,000) would receive about $900 in tax relief (approximately 1.6% of their after-tax income) in 2018, while those earning $733,000 or more would benefit from an average cut of $50,000 (roughly 3.4% of their after-tax income). If you earn $65,000, you’ll save around $930, per TCP. If your income is $500,000, your savings will be approximately $13,480.
The one exception where wealthier individuals may not benefit as much is in the capping of the deduction for state and local taxes (SALT) at $10,000 (this includes both income and property taxes). Previously, there was no cap. So, if you are wealthy and live in a state with high local taxes (such as New Jersey or New York), you could see a reduction in your tax break due to this cap.
The very rich also stand to benefit from a change to the estate tax. Currently, estates worth $5,490,000 are taxed at a 40% federal rate on inherited property (which, in 2013, affected just 0.2% of estates, around 4,700 out of the 2.6 million total deaths in the U.S.). Now, estates worth up to $10 million will be exempt from the tax. So, if you expect to inherit between $5.5 million and $10 million, enjoy your new tax break.
For businesses, the news is all positive. Starting next year, the corporate tax rate will fall from 35% to 21%. Additionally, individuals can now deduct 20% of their qualified business income from a partnership, S corporation, or sole proprietorship (known as pass-through income).
While corporate tax cuts are permanent, the personal tax provisions will expire after 2025 (although Republicans have pledged to renew them when the time comes). The Tax Policy Center projects that by 2027, 53% of people will end up paying more in taxes.
How the Tax Bill Will Be Funded
According to the nonpartisan Joint Committee on Taxation, the bill will add over $1.46 trillion to the deficit over the next decade, with almost no provisions to compensate for those losses.
House Speaker Paul Ryan has long advocated for cutting social programs and pursuing “entitlement reform,” which would involve cuts to Medicare and Medicaid. He has also stated that he will look at these programs as a way to reduce the deficit. Senator Marco Rubio has similarly suggested that Medicare and Social Security will need to be overhauled to cover the deficit caused by tax cuts, “in a way that doesn’t impact current retirees or those close to retirement, but would likely affect me and younger generations.” (Trump has consistently said he will not touch these programs.)
Another criticism of the bill is that while the average person will see a $1,600 tax cut in 2018 (you can use this calculator to get a more personalized estimate), the increased deficit created by the bill could lead to restructuring of Social Security and Medicare, potentially costing younger people far more than the $1,600 they save.
There’s also the repeal of the individual mandate to consider. The CBO estimates that lower-income individuals will end up paying more than the tax relief they receive, as “average premiums in the individual market would rise by about 10 percent” when healthier people opt out of coverage. For a family of four without subsidies, this could lead to an annual premium increase of $1,990 for the benchmark plan, according to the Center for American Progress.
The table above illustrates this effect, with positive numbers indicating increased taxes or spending: the poorest will see higher costs, while the majority of the benefits go to the wealthiest families.
How It Will Impact the Economy
Proponents of the bill argue that reducing corporate taxes will ignite the economy, encouraging businesses to raise wages and reinvest in the U.S. economy. However, many are justifiably skeptical about this outcome.
Some companies have announced one-time bonuses for certain employees following the passage of the tax bill, attributing the payouts to the changes in tax law. However, the reality is more nuanced. For example, while AT&T distributed $200 million in holiday bonuses last week, the company has also been cutting potentially thousands of jobs. It's important to note that a bonus is not the same thing as a salary increase.
The tax cuts are more likely to benefit shareholders and investors, as Wells Fargo CEO Tim Sloan stated, in the form of increased shareholder dividends. Executives have already shared their plans for the savings, and they don’t seem to involve employee investment: a Bank of America Merrill Lynch survey this summer of over 300 U.S. companies asked what they would do with the money they could repatriate at a low tax rate, which the bill facilitates. The top responses were: reducing debt, buying back stock, and pursuing mergers.
This means that older, wealthier individuals who earn from investments will benefit in two ways: they will gain from the tax cuts while avoiding the long-term repercussions. For younger Americans, however, the outcome is less favorable.
