It’s controversial. But you knew it would be. For conservatives and most in the Republican Party, the plan is a panacea that will fix all of the economic ills of the nation. Leaders in the Democrat Party and liberals believe it’s akin to a get out of jail free card for the rich and big business.
The bill is called the Tax Cuts and Jobs Act and is now being marked up in the House Ways and Means Committee and by the time you read this it may be close to ready to be voted on by the entire House and sent to the Senate.
If you haven’t seen the bill or paid much attention to it, here are the highlights.
Personal: In brief, the bill shrinks the number of tax brackets from seven to four. Rates will be:
Single — $12,00 to $45,000
Married filing jointly — after the $24,000 deduction up to $80,000
Begins at $45,000 for single filers
$90,000 and up for married filing jointly
Starts at $200,000 for single filers
Married filing jointly starts at $260,000
39.6% — this rate stays
Goes into effect at $500,000 for single filers
$1 million for couples filing jointly
The bill doubles the standard deduction for singles to $12,000 and $24,000 for married couples.
The home mortgage interest deduction is reduced for new purchases to $500,000 from the current $1 million.
Deductions will be gone for:
• Medical expenses
• Tax preparation expenses
• Moving expenses
• Most personal casualty losses unless it’s related to disaster relief
In 2023 the estate tax will be done and until then the excluded amount doubles from the current $5.49 million.
Giving gifts? The top tax rate there drops to 35% from 40%.
State and local tax deductions — one of the most controversial aspects of the bill and one that will likely go away or be drastically modified — are gone. The deductions for state and local property taxes are capped at $10,000.
The child tax credit is up to $1,600 from $1,000 for each child under 17. Each parent will also get an extra $300 credit as part of the family tax credit.
Business: The corporate tax rate falls to 20% and the pass through tax rate will drop to 25% from the current 39.6%. However, it limits the kind of income that qualify. Here’s who doesn’t automatically qualify though there might be situations where they would:
• Financial service workers
• Performance artists
Those business owners who are qualified can count 70% of their income as wages which will be subject to their personal income tax rate. Thirty percent (30%) can be claimed as business income which will be taxable at the 25% rate.
Those investing can immediately expense the cost of new investments instead of having to depreciate it over a number of years. Immediate expensing — however — ends in 2023.
Internet expenses that exceed 30% of income can no longer be taken.
Multinational companies with offshore earnings can bring that money back into the country and only be taxed up to 12%.
There’s more but you can look it up.
One interesting bit in the bill is a repeal of 1954’s Johnson Amendment. If passed the bill will now allow churches to endorse political candidates and take a stand on political issues without risking their tax-exempt status. However, those opinions must be done in the “ordinary course of the organization’s business” whatever that means.
Expenses also must be minimal.
So, is this a good deal? PIA National is analyzing the bill but thinks it may fall short of the Trump and Republican stated goal of helping small business.
In a statement PIA National said, “PIA members own their own independent insurance agencies and are small business owners. Because most small businesses are organized as sole proprietors, partnerships, or Subchapter S corporations, they do not pay corporate income tax. Instead, their income “passes through” the firm and appears directly on their owners’ individual tax returns, where it is taxed as normal income.”
Some of that may change said PIA National Vice President of Governmental Affairs Jon Gentile. “As PIA continues to analyze the proposal released this morning, we are concerned the legislation may not adequately benefit small business owners who organize as S corporations. We will continue to study this proposal and work to ensure that tax reform provides the badly needed relief for small business owners. PIA looks forward to working with Congress and the administration to address our concerns.”
That leads to who wins and who loses in the reforms. The Hill is a fairly middle-of-the-road news source. It did an analysis of the bill. It noted that House Speaker Paul Ryan thinks the average family of four earning the median income of $59,000 will save $1,182 a year on their taxes.
Democrats say it’s a boon to the super-wealthy and to corporations.
Big business is a winner for sure with the corporate tax rate falling to 20% from 35%. There are other wins as well with new equipment investment changes. Groups like the Business Roundtable — led by JP Morgan Chase chairman Jamie Dimon — are raving about the plan as is the U.S. Chamber of Commerce and other business groups.
The one exception is the National Federation of Independent Business who says it cannot support the bill in its current form because it doesn’t do enough to help small business.
Other winners — says The Hill — are the super wealthy. Though their top tax rate is still in place, there are deductions and things like changes to the pass through tax which will benefit wealthier business owners.
And it eliminates the alternative minimum tax.
On the worry about 401(k) contribution limits, nothing has changed.
The Hill says there are lots of losers.
Those living in states with state and local taxes will no longer be able to deduct them.
Homebuilders and real estate agents think the bill will lead to drop in a home value and will set up a tax increase for middle class homeowners. And then there’s the cap in the deduction for a new home. It falls from $1 million to $500,000. Granger MacDonald of the National Association of Home Builders said the bill is not — like it is being touted — an incentive to buy a new home.
“The bill eviscerates existing housing tax benefits by drastically reducing the number of homeowners who can take advantage of mortgage interest and property tax incentives,” he said.
One report you are likely to see is from the Tax Policy Center. It contends 28% of us will see our taxes rise and those making less than $48,000 a year will be hit the hardest. A few days after releasing the report, the TPC withdrew it and said it made a critical calculation and its report is wrong.
Another report comes from Congress’ Joint Committee on Taxation. It did an analysis of the bill and said after 2023 those making $20,000 to $40,000 and between $200,000 and $500,000 will pay more in individual taxes than they do now.
The report — however — does not say why or how it came to that conclusion.
Source links: CNBC, Insurance Journal, The Washington Post, The Hill — link 1, link 2 —