By Emmy Hernandez
Many have reached out to me, in my role as a tax attorney, to help them understand what’s in the tax overhaul bill recently passed by the US Senate. Much like the legislators that voted both for and against the measure, I haven’t read it. Fortunately, the Congressional Budget Office and the Tax Policy Center have. Here’s a bird’s-eye overview:
The Tax Cuts and Jobs Act has three core components: the restructure of the individual tax code, a significant corporate tax reduction and the elimination of Obamacare’s individual mandate.
Ending the individual mandate means that no one will pay a tax penalty for not having insurance. This will decrease the federal government’s income by almost $400 billion over the next decade.
The baseline corporate tax will be slashed from 35 percent to 20 percent – an enormous 43 percent drop. This will reduce the Fed’s proceeds by an estimated $1.5 trillion over ten years.
For individual taxes, this bill would make $4.1 trillion in cuts and include $3.1 trillion in new tax increases. The distance between the two is roughly $900 billion.
The framework of the Tax Cuts and Jobs Act would reduce America’s revenue by about $2.4 trillion during the next decade.
It’s highly unlikely that the government’s bills will be equally trimmed, sorry Baby Boomers but this is largely due to you, so that $2.4 trillion tax-holiday now becomes new national debt. (Luckily, lots of other countries want to lend us money.) Current law, however, only allows a maximum of $1.5 trillion in additional congress-induced debt per decade, so about $900 billion dollars must be moved off the books using legislative add-ons, carve-outs, loopholes and other gimmicks.
This is being accomplished during the closed-door Reconciliation meetings that are being conducted right now as you read this.
Unsurprisingly, many people have meandered away during this monologue. Those that remain inevitably ask: “But, how will this affect me?” The Shrugging Shoulders emoji is the only honest response. Typically, I’d prefer to construct a hypothetical scenario and compare the Before and After tax filings in an easy to read chart. Unfortunately, at this time I cannot.
The fates of many popular deductions are all up in the air. Personal and dependent exemptions, child tax credits, higher education, mortgage interest and medical expense tax credits are still unsettled.
The Senate plan does allow corporations, but not small businesses or natural persons, to deduct state and local taxes. Mitt Romney once said: “Corporations are people too, my friend.” Under the proposed new tax rules, a corporation is the kind of person I would like to grow up to be.
Poorly constructed humor aside, this is a serious concern for Californians. Well-paid professionals here could end up paying more to the IRS, thanks to the loss of the valuable state and local income tax deduction. Homeowners may even see their home values drop if property tax deductions or the mortgage interest deduction are significantly diminished.
Tax Policy Center estimates that 80 – 85 percent of families nationwide earning between $86,000 and $300,000 will enjoy an immediate tax decrease. Conversely, 15 percent – 20 percent will experience an increase, resulting from the confluence of lost itemized deductions and eliminated personal exemptions.
Finally, one of the largest benefits will go to businesses that file taxes under the individual tax code – called “pass-through” entities. Under the Senate legislation, these “pass-throughs” will pay less than either corporate or individual taxpayers. This will create a massive incentive for both individuals and corporations to try to legally restructure themselves.
At its core, the Tax Cuts and Jobs Act creates new corporate tax policy. The tax changes for individual and families are will be rejiggered as needed to keep the entire bill within the $1.5 trillion spending limit. The 43 percent baseline tax cut for corporations, as written, is permanent.
Dozens of the tax bill’s most important individual provisions are set to expire a few years from now. The individual tax rate cuts, for instance, expire in 2025. So, too, will the expanded child deduction and the doubling of the standard deduction. In 2027, any and all changes to the individual tax code will automatically revert back to what the law is now.
Perhaps, it’s no great mystery to why the bill is written this way. I think there’s an emoji representing that sentiment as well.
Currently, about 30 percent of American households include itemized deductions with their tax filings. It’s predicted that once the standard deduction is doubled, only 10 percent will make use of the itemized deduction forms. IRS auditors may initially be relieved by the lighter work load. But eventually, two-thirds of them may find themselves sifting through the classifieds seeking new employment. Perhaps many of these career civil servants will be surprised to discover that most newspapers no longer print that particular section.