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Tax Reform - Empty Promises

Why do we bother voting? Sure, it is exciting when your party wins, and especially for an upset victory. Expectations are high, excitement abounds, and the future looks brighter. Until the neophytes arrive in Washington, D.C., where the “Swamp” is murkier and stronger than they ever expected.

Never has this been more evident than in the new “Tax Cut and Tax Reform” outline unveiled on Wednesday last week in Indiana. The proposal is the result of months of collaboration by a committee of 6. It seems that a funny thing happened between New York City (Trump’s original proposal) and Washington, and none of it was good. Seriously, in this proposal there is something to be disliked by almost everyone. As usual, there are some winners and losers.

First, there are some winners:

  • Huge public corporations
  • Heirs of rich dying people (maybe)
  • People paying Alternative Minimum Tax (AMT)
  • Certain small business people

The original Trump proposal reduced corporate taxation from 35% to 15% for all businesses. What did we get offered so far? 20% for C-Corps, and 25% for S-Corps. I’m guessing it winds up even higher.

What about the “postcard tax form for most people?” We already have a one-page tax form, the 1040-EZ. Hardly anyone knows that it exists, and very few filers are allowed to use it. Let’s discuss simplification for a moment. The instructions for the 1-page 1040-EZ are 46 pages long!

So, who can use the new “postcard?” It is perhaps more instructive to describe who cannot use the form. Here are a few examples of who cannot use the 1040-EZ, and therefore probably will not be allowed to use the postcard:

  • One or more of you are 65
  • You claim any dependents
  • Taxable income exceeds $100k
  • You receive dividends from stocks or mutual funds
  • You have any capital gains
  • You contribute to a tax-deferred IRA
  • You claim any tax credit except EITC
  • You claim premium tax credit or pay advance premium tax credit (applies to certain states)
  • You had income other than wages, salaries, or tips (this includes every self-employed worker, professional, small business owner, investor, parent, and a host of others)

If one or more of these applies to you, you may understand the chicanery of politicians holding up the postcard for all to see, touting the great “simplification.”

What do politicians mean by “tax simplification?” Fewer tax rates? Fewer allowable deductions? Good news -- the outline stuck to Trump’s original proposal to double the Standard Deduction (SD). If accomplished, many fewer people will itemize on their tax returns. However, this provision seems to come at the expense of the Personal Exemption (currently $4,050 per person), which means that middle class families with children will likely get a big old tax increase!

I could be far more critical of other parts of the tax reform proposal, if only I knew more details. What is more important, the number of tax rates, or the income level at which the rates apply? We do not yet have the information needed to decide. It is impossible to estimate proposed taxes unless we have the rudimentary knowledge of the brackets for taxable income.

Somebody, please, DRAIN THE SWAMP!

Van Wie Financial is fee-only. For a reason.