I recently read a summary produced by Ernst & Young of the latest tax reform bill called the Tax Cuts and Jobs Act. The bill is the work of some Republicans looking to overhaul the tax system, something that hasn't been done in 30 years. The proposal addresses a number of things including but not limited to corporate tax, partnership tax, international issues, the insurance industry, pensions / retirement, accounting methods, and most importantly individual taxes.
My first thought is that the offerings and eliminations are too numerous to enact in a single sitting. I'm not surprised, since the GOP has been looking for ways and means to get a tax bill passed for the longest time. In my opinion, if the government wants to make change, it should do so in steps. This all-in-one pitch is likely to have missteps and eventually gaps that will be detrimental instead of helpful.
If you haven't been paying attention, this is the time to do so. My reading of the highlights quickly angered me in more ways than one. And I'm sure you will feel the same. I seriously hope that this bill is rejected and better propositions are given. I think the nature of this proposed act is more beneficial to the wealthy and corporate, rather than the middle class. Let me try to identify why. While I have some gripes with corporate tax and know it will be a large headache in the short term (for me as a corporate tax accountant), I'll concentrate on individual taxes for now for the sake of this post.
Here are a few of the things that I found particularly annoying that primarily affect the middle class:
- The standard deduction is proposed to be increased to $12,200 for singles and $24,400 for couples. BUT they are doing away with the personal and dependent exemptions. So a single filer as it currently stands can take $6,350 as a standard deduction with a personal exemption of $4,050. That equates to $10,400 in deductions. The changes would only net you $1,800 more in deductions. AND if you have a dependent, that would have been $4,050 more in deductions which would be in excess of the new $12,000 standard. So for families, each child you have would NOT be produce a deduction in the proposed tax plan. That's a major detriment in my eyes.
- The act is looking to repeal the state and local tax deduction. If you live in a state that applies income tax, then you are paying taxes on your hard-earned income to that state. That payment currently can be deducted if you itemize. Depending on which state your reside, state tax rates can be as high as 12%. For some people, the state and local taxes that they pay are in excess of the proposed standard deduction. Yet another detriment for the middle class people.
- Republicans are also looking to limit the deduction allowed for real estate taxes paid. Where currently, you can deduct all the tax you pay for your property, the suggestion is that only $10,000 of real estate tax will be deductible. If you live in the Northeast or any high property tax area, this is going to be an issue. You'd be forced to leave a deduction that was historically allowed on the table yet again if tax reform is passed.
- The proposal also calls for reducing the cap on the mortgage interest deduction. This means new buyers can deduct interest on loans only up to $500,000, down from $1 million. Anything in excess of $500K that you would be paying interest on would not be allowed as a deduction. Additionally, homeowners will only be able to deduct interest on the mortgage for their principal residence, meaning you won't benefit from this tax break if you have a vacation home like in current law. Sounds like a penalty for the upper-middle class.
- You'll also want to think twice about taking out a home equity loan or line of credit, as the bill won't permit you to deduct the interest either. Looks like you're not going to want to build out that extension of your home, or add a deck, or borrow against your house to take that vacation or pay for college tuition. Talk about limiting!
- The deduction for casualty loss would be repealed. So for those of you who are affected by hurricanes, fire and other disasters that are not compensated by insurance you're at an even greater disadvantage thanks to your Republican tax lawmakers if the bill is passed.
- Tax preparation expenses, alimony payments, and moving expenses (although limited now) are looking to be cut out of the tax code completely, and therefore non-deductible in any way.
- Repeal of education provisions:
- Deduction for interest payments on qualified education loans for qualified higher education expenses of a taxpayer, the taxpayer’s spouse, or dependents
- Deduction for qualified tuition and related expenses
- Exclusion from income of interest from US savings bonds used for qualified tuition and related expenses
- Exclusion from income of qualified tuition reductions provided by educational institutions to their employees, spouses, or dependents
- Exclusion from income of employer-provided education assistance
- This all spells disaster for students who are already reeling from the sky high cost of secondary education in America. And this will have a snowball effect. Instead of encouraging learning, potentially bright students will shy away from racking up debt. That will diminish the potential of the education system and at some point reduce the educated workforce. Not good.
- Alternative Minimum Tax (AMT) would be repealed. Why? They take advantage of every single tax break and often times end up not paying tax. Shouldn't they have a minimum to help do their part?
- The tax brackets are changing. Currently, there are seven tax brackets: 10 percent, 15, percent, 25 percent, 28 percent, 33 percent, 35 percent and 39.6 percent. The proposal is consolidating brackets, so the remaining will be: 12 percent, 25 percent, 35 percent and 39.6 percent.
- What does this mean? It means that the wealthy are actually getting a break! For example, a couple who is making $500,000 is subject to 39.6% currently. The new plan would afford them a discount to 35% as the highest income bracket would not begin until you hit the $1M mark. Unreal!
- The estate, gift, and generation-skipping taxes initially would be retained with a doubled $10 million basic exclusion, but after 2023 the estate and generation-skipping taxes would be repealed (with a stepped-up basis in property) and the top rate on the gift tax would be reduced to 35%. That's a big deal from an estate planning perspective.
What I'm trying to point out is that, in my opinion, if you are in the middle class, you have more to lose than to gain. This proposed tax bill and reform are lopsided. A majority of Americans are in the low to middle class and this act doesn't benefit the people who make American great. Instead, Republican tax lawmakers are penalizing the vast majority for their hard work and dedication. Find a different way because this proposal will not work.
And for us, the middle class, this is an opportunity to push back. We cannot just accept change and work around it. We'll be hurting ourselves and our families in the long run if this bill is enacted. (1262)