President Trump had a major goal of cutting taxes. I applauded that idea, because it has worked every time it has been tried. People would be better off, the economy would grow, and government revenues would increase through economic growth.
Remember Trump’s proposal? Here were the major objectives:
- Every American should get a tax cut
- It would be the largest tax cut in American history
- The average savings would be $4,000 per household
- Most people would file tax returns on a postcard-sized form
- Corporate tax rate would go down to 15%
- All small businesses would get the same 15% rate
The news is in, and I don’t like it. Remember, IT IS JUST A PROPOSAL. No one can say for sure what will and won’t be in the end product, so for today the discussion will be limited to the interpretations I have been able to find so far. Here are some highlights from the so-called “Tax Cuts and Jobs Act:” (G = Good; B = Bad.)
- G - Actual tax bracket limits are higher, with the 25% bracket extended to $260k for married, and $200k for single
- B - Indexing is changed to “Chained CPI,” which they have been trying to do for a long time, as it slows the growth of tax brackets and Social Security payments, essentially giving us an annual tax hike
- G - We didn’t lose the entire property tax deduction
- B - The property tax deduction limit is $10,000 annually, which affects a lot of people, but also takes away (for many people) a tax planning opportunity
- G - The number of brackets is reduced
- B - This is totally meaningless
- G - We lost the State and Local Tax deduction (SALT)
- B - We lost the State and Local Tax deduction (SALT)
- G - The Standard Deduction has been doubled
- B - No it hasn’t, because the Standard Deduction rises from $12,700 to $24,000 (I can do that math), and the elimination of the Personal Exemption, which reduces taxable income by $4,050 per person, is somehow forgotten in that analysis
- G – Many middle-class taxpayers will receive a tax cut
- B – Many middle-class taxpayers will get a tax increase (especially those earning over $150k)
- G – The Corporate Tax Rate drops from 35% to 20%
- B – Very few corporations pay the 35%, and a lot of tax credits will be lost (and, what happened to 15%?)
- G – Small business using pass-through taxation (owners pay the taxes on profits) will be capped at the rate of 25%, down from 39.6%
- B – What happened to equal treatment (15% at first, now 20%) for small businesses?
- G - Property taxes will remain deductible
- B – The limit is $10,000 annually
- G – Mortgage interest remains deductible
- B – It is limited (on new mortgages) to interest on $500k of debt, and second homes lose their interest deduction – your home may get devalued by this (also applies to RVs and boats)
- G - Estate taxes are phased out over 6 years
- B – It doesn’t affect most of us anyway
- G - AMT is (finally) repealed
- B – It takes years to reclaim the AMT you have already paid in
- G – Child tax credit rises to $1,600
- B – There is still a phase-out for families with higher income, who already lost their Personal Exemptions
- G – Deductions are simplified
- B – That means most deductions are being lost
- G – Alimony payments received are no longer taxed to the recipient
- B – Alimony payments are no longer deductible to the Payer – how many divorce settlements are going to have to be re-written?
- G – The Act retains the tax-free gain on the sale of personal residences
- B – Instead of the 2-of-5 years rule, it is now a 5-of-8 years rule
- G – Roth conversions continue to be allowed
- B – The Recharacterization rule that helps tax planning is repealed, no longer allowing the IRA owner to “undo” a Roth conversion, in whole or in part, the year following the conversion
The loss of Personal Exemptions is being used to deceive the public. Worse yet, small businesses offering professional services may lose their Sub-S tax advantage. This provision, if implemented, would result in a hefty tax increase on many professionals (yes, I would be among them).
I truly hope that the flawed Republican Tax Cut Proposal can be repaired. If not, I would prefer that it go up in flames.
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