The Senate passed the GOP Tax Bill in the early hours of Wednesday, December 20, 2017, making this the biggest tax overhaul since 1986. According to the Congressional Budget Office, this bill is estimated to cost $1.47 trillion over a decade.
There are different opinions and perspectives on who benefits the most from the tax bill: the middle class? Small businesses? Large corporations?
I say, “it is a WIN for everyone”. The tax overhaul affects and benefits every unit of the economy – individuals, families, and businesses; as well as the economy as a whole.
I consider this an important development you should know: how they affect your finances, what you should expect in the coming periods.
Here are key highlights of the Tax Cuts and Jobs Act, and what they mean for your money and the economy.
KEY PROVISIONS FOR INDIVIDUAL TAXPAYERS
Lowers Tax Rates
Your individual income tax rate is now lower. The bill reduces the highest tax rates from 39.6% to 35%. Whether you are a single filer or married filing jointly, this bill lowers your tax rate compared to what the current tax law provides.
Use the tables below to locate your tax bracket and see how your rates under the Tax Cuts and Jobs Act compare with the current rate.
For Single Taxpayers:
Example: The tax rate for an individual that earns $100,000 will be 25% under the current law. With the new Tax Act, the tax rate now falls under the 22% bracket.
For Married Tax payers Filing Jointly:
Increases Standard Deduction to Almost Double
The New Tax Cuts and Jobs Acts increases the standard deductions by almost double. For single filers, the standard deduction increased form $6,500 to $12,000. That means if your deductible expenses are less than $12,000, you can conveniently take the standard deduction. For some people that go out of their way to give charity donations just to add up to the list of items to be itemized, this might be an opportunity to rethink some actions you do not genuinely want to take. If your deductions do not exceed these new standards, no need to itemize!
Table 3 below shows the current standard deduction in comparison with what the Tax cuts and Jobs Act provides.
Eliminates Personal Exemptions
Here is the trade-off with the increased standard deduction. You are normally allowed to claim exemptions for yourself, your spouse, and your children in the amount of $4,050 each. This exemption reduces your taxable income and ultimately lowers your taxes. The new Tax plan ELIMINATES these exemptions!
This is one area that affects most families especially those with more than one child. While there are other significant tax benefits from this new plan, the elimination of personal exemptions is a big hit for most families.
Expands Child Tax Credit
The child tax credit doubles from $1,000 to $2,000 for children under 17 years old. The first $1,400 will be refundable. However, to claim the full credit, the income limit is raised from $75,000 to $200,000 for single parents, and from $110,000 to $400,000 for married couples. This means that the high-income earners are more likely to benefit from this increase.
Limits Deductions for State and Local Taxes
Normally, the state and the local tax deduction is unlimited. This bill preserves the state and local tax deductions for those who itemize; however, the amount that may be deducted is limited to $10,000.
Repeals the Individual Mandate
The Obama care provided for Individual Mandate, which means that you must have health insurance coverage or you pay a penalty for not having coverage for the year. The Tax Cuts and Jobs Act effectively repeals the individual mandate. Effective January 1, 2019, the penalty for not having health insurance coverage will be $0.
Reduces the Number of Filers Who Pay the Alternative Minimum Taxes (AMT)
This bill keeps the AMT, but it raises the exemption amount to reduce the number of tax filers who get hit by the AMT. It raises the income exemption amount from $54,300 to $70,300 for single filers, and from $86,200 to $109, 400 for married filers.
Adopts the “Chained” Consumer Price Index as a Measure of inflation
To account for inflation, the Tax Cuts and Jobs Act adopts a different measure of adjusting the tax brackets and other provisions, called the Chained Consumer Price Index. This means that the maximum amount of earned income tax credit individuals can get will rise slowly over time, and will eventually erode its value. What does this mean? According to a study by Center on Budget and Policy Priorities, a married couple making $40,000 with two children would see their EITC shrink by $322 in 2027 (from $4,974 to $4,652).
Most Changes Expire on December 31, 2025
Most of the changes to the individual income tax are temporary and expire on December 31, 2025. However, some will remain permanent, such as the repeal of the individual mandate and the adoption of the Chained Consumer Price Index.
KEY PROVISIONS FOR BUSINESSES
Cuts Corporate Tax Rate
Just like the individual tax rates, the bill lowers corporate tax rate from 35% to 21% starting in 2018. Businesses now have to pay lower taxes on their profit income. The change is permanent! There are so many arguments that businesses will not shift the tax benefits to consumers, and will likely not benefit the masses.
My take is that even if those tax benefits do not translate into higher wages, they will benefit the people in different ways, either directly or indirectly. Business expansion, job creation, more flexible work environment, bonuses, and many more, are just a few of the many ways people can benefit. For small businesses, this will give them a little room to reinvest, grow, and expand.
Reduces the Tax burden on Certain Pass-through Businesses
The bill provides for a 20% reduction in the tax burden of owners, partners, or shareholders of some S-corporations, LLCs, and partnerships who pay their share of the business taxes through their own tax returns.
Certain pass-through businesses in the service industry such as health, law, and professional services are excluded from this reduction.
Introduces the Territorial System for Taxing the Multinational Companies
The multinational companies would normally pay taxes on all the profits they make regardless of where it was earned. This means that even if they make profits from their operations abroad, they will pay taxes to the US on that profit. The Tax Cuts and Jobs Act introduces the territorial system, which allows multinational companies (MNCs) to pay taxes only on the profits made in the US. No taxes will be owed on profits made offshore.
However, for any existing offshore profits, the bill allows the MNCs to pay a one-time low tax rate of 15.5 % on the profits they have as cash or cash equivalents; and 8% on profits reinvested.
This means that the American businesses will be better positioned to compete globally since most offshore firms already adopt the territorial tax system.
CONCLUSION
Generally, I consider tax cuts as pro-growth. Regardless of who benefits the most, tax cuts create a trickle-down effect, stimulating investments from both the businesses and individuals. The ultimate result is overall economic growth.
Think of what happens when individuals have extra income at their disposal, they most likely consume more! When they consume, they are spending more and patronizing businesses. Businesses flourish and the economy booms. Also, for those consumers who consume less, they save more and are more likely to invest more. They are not only improving their overall personal finances, their investments put money back into the economy, the economy grows, the people benefits.
