The GOP Tax Plan: How Will You Fare?

Federal Income Taxes, Investing & Retiring, Taxes, The Economy


Cut, Cut, Cut

After a short delay and with significant fanfare, the House of Representatives released the Republican tax reform plan last Thursday. The Tax Cuts and Jobs Act – or, if you prefer the Trumpian term, the “Cut Cut Cut Act” – represents an ambitious attempt to change the tax code in a way that provides tax relief for American people and businesses while stimulating economic growth and creating jobs. Did we mention all this takes place without blowing up the deficit?

While you may appreciate the overall goal, you probably have a laser-like focus on one question, “Will my taxes go up or down?” That depends on many factors that are still fluid, but you can get a good guess by reviewing last year’s tax form and looking over your balance between deductions, exemptions, and credits.

Simplification Through Elimination

Remember that there are two primary goals of this legislation – cutting taxes and simplifying them. (Feel free to add your own opinion of non-stated goals based on your political persuasion.) For personal taxes, simplification means eliminating a number of itemized deductions and credits while balancing them out with lower overall tax rates and increased basic deductions.

Did they succeed? To a certain extent, they have. Looking at proposed rates, only two income groups will see higher tax rates – those who earn $19,050 and less will see their rates rise from 10% to 12%, and those who earn $237,950 to $424,950 will see their rates rise from 33% to 35%. The lower income end will be compensated through a large increase in the standard deduction and child tax credits, while the other segment will likely be covered by the proposed removal of the Alternative Minimum Tax.

However, there are seams in each of these assumptions. Consider lower-income taxpayers to start. Generally, lower income filers do not itemize, so their greatest benefits are from the standard deduction (currently $6,350 single and $12,000 married filing jointly), personal exemptions ($4,050 for each dependent) and the child tax credit ($1,000 directly off the tax bill).

The GOP plan will raise the standard deduction significantly ($12,000 single and $24,000 married filing jointly) while eliminating personal exemptions. Taxpayers gain a large deduction but give $4,050 back in the personal exemption – and for those with children and/or dependents, the overall tax deduction is lower under the GOP plan because the $4,050 for each dependent is lost as well.

Thus, a married couple with no children goes from a $20,800 deduction to a $24,000 deduction, but that same couple with two children goes from a $28,900 deduction to the same $24,000. To compensate, the tax bill increases the child tax credit from $1,000 to $1,600 – a substantial savings since that is subtracted directly from your tax bill. (Deductions only subtract from your tax bill in proportion to your tax rate).

In other words, it’s not easy to determine whether you will come out ahead without doing a mock tax return. Simple calculators are available to give you a crude estimate of where you stand – but these are still crude estimates, subject to change.

Check Deductions and Credits

If you itemize deductions, you need to take a hard look at some of the more controversial deduction and credit changes and see how you will be personally affected.

Education is hit in a number of unpleasant ways. Do you have an outstanding student loan? Say goodbye to your ability to deduct your student loan interest payments. Are you in graduate school? You are more likely to be squeezed on tax credits since the three existing higher education tax credits will be folded into one credit, generally limited to four years. Are you a teacher? You are set to lose the deduction for the cost of educational supplies that you purchase.

Considering a large mortgage? The mortgage interest deduction remains but is capped at the first $500,000 of new mortgage debt – a big hit to areas with high housing costs (mostly blue states). Blue state residents will take another disproportionate hit from the reduced state and local tax (SALT) deductions, as taxpayers may only deduct up to $10,000 in local property taxes.

As more details emerge and compromises are enacted, think about the concrete ways in which your taxes will be affected by these changes, focusing on exemptions, deductions and tax credits. As unpleasant as it sounds, try preparing a mock tax form under current conditions. Not only will this exercise help you gauge the effect on your taxes, it should also make April easier – because all you have to do is make corrections instead of starting from scratch.

The Takeaway

It seems likely that the Republican-controlled Congress will pass some variety of tax plan, if for no other reason than for electoral survival. The Republican base is already on edge after the failure to pass a health care bill, and failure to pass a tax bill could mean an early exit for those up for re-election.

However, that tax bill may look significantly different from the final version. By preparing a mock tax return in advance, you will be able to see more easily how changes will affect you.

Keep up with the news as the horse-trading begins and the tax bill winds its way through Congress. Don’t be afraid to let your Congressional delegation know if you don’t like the direction the bill is heading. When representatives are in survival mode, they are more sensitive to public input. Your opinion may carry as much weight now as it ever will.

Get your Refund Fast and File your Taxes for Free.

Photo ©iStockphoto.com/doublediamondphoto



Source link

Products You May Like

Leave a Reply

Your email address will not be published. Required fields are marked *