I’ll preface this by saying that when people start talking about numbers, stock, finances or taxes, my eyes glaze over and I use my perfected head nod, smile and timely, “Wow so interesting.” Or “Really, is that so?” phrases as the conversation continues.
This hasn’t changed, believe me, but I realized that as our Nation is starting to undergo some major changes in the year that Mr. Donald Trump has stepped into office, I was going to have to do some research to understand the changes (hem, damage) that is being done. Almost every evening, my parents and I sit and watch the local and national news. As the news began to emerge about a New Tax Bill, I only half listened; that is until it started to sound like Reaganonimics, the trickle down effect of the economy that did not go well back in the 1980s. My interest was piqued: What is this new deal? What does it mean for the future?
I set to work.
According to The Chicago Tribune, a “good tax reform should make a complex economy more efficient and ultimately put money in people’s pockets.” While Mr. Trump was on the campaign trail, one of his platform points was to create tax reform. In anticipation of such a change since his election, the stock market has boomed, but if the reform does not happen, it is estimated that the market will loose its momentum. Goldman Sachs, a major bank on Wallstreet, “put out a warming recently that the US debt is on track to hit unsustainable levels in coming years (Washington Post).” The last major change to tax bills was in 1986 under the presidency of Ronald Reagan.
While Mr. Trump just recently signed this bill into law, I must admit that there is not a single website that I can find that fully encapsulates what exactly is in the new bill. The following is a mix of many different sources that were published after the bill was signed on December 22, 2017.
Currently, when every family begins to file their taxes, they look at their annual income and then see the designated tax bracket that they fall into based on their income.
The current breakdown of tax brackets ranged among seven different categories: 10%, 15%, 25%, 28%, 33%, 35%, 39.6%. The reformed tax bill keeps the seven different categories but changes them slightly. The new tax brackets are: 10%, 12%, 22%, 24%, 32%, 35% and the top percentage being 37%. While the percentages are staying roughly the same, the incomes are slightly decreased until the top two percentages which hold largest income rates being at $200,000 and excess over $500,000.
The standard deduction nearly doubles from $13,000 to $24,000 under the new bill. Which according to Politifact, means that taxpayers will have to itemize in order to reduce their tax burden. But, the personal and dependent exemption which hovered around $4,000 is repealed. While the child and dependent tax credits are still on the bill, the tax credit for children has doubled from $1,000 to $2,000 including $500 for non-child dependents – those that are aged 15-24 and who are not full-time students nor has a partner nor a child of their own. There is also an alternative minimum tax, a mandatory alternative to the standard income tax for individuals, which eliminates many deductions for those in higher brackets to make sure they pay. The ATM tax is also higher than the regular tax as is the ATM exemption compared to the standard exemption. But only those that qualify truly have to worry about the ATM tax, if you don’t make between $500,000 to $1Million, like most middle class Americans, then don’t worry about it.
What does this actually mean?
While many of the Republicans that are in favor of this, claim that it will help the ‘middle class American’ the ‘middle class American’ is a very broad term when it comes to a ‘typical’ financial situation in each household. The broadly defined middle class American household can average a combined income from $40,000 to $100,000 a year (NYT).
One of the major and most significant changes to the tax bill is the change in the deduction of state and local taxes. Currently “more than 40 million households wrote off a combined $350 billion in state and local income and sales taxes in 2015, according to the IRS, and 38 million households deducted close to $200 billion in property taxes.” (NYT). In the early drafts of the bill, both would have disappeared; now, it will be capped at $10,000.
One of the lasting legacies of President Obama’s terms was enacting the Affordable Care Act, which required health insurance for every American and allowed them to get it through the government. Currently, if you do not have health insurance, you are fined on your taxes; this will end with the new tax bill.
Much like the state and local taxes, there are new requirements in the Mortgage interest deduction and estate taxes. The MID claims that those residents with more expensive real estate will be hurt by these changes, a claim that Mr. Trumps administration has been saying all along, that those that are wealthier will not actually gain from this plan. “Previously, interest on mortgages with up to $1.1 million in debt were allowable. That cutoff will shrink to $725,000 for new mortgages. (Politifact).” The estate tax remains but is now doubled with the amount that is shielded from taxes. This will affect estates of at least $11.2 million to $22.4 million. Meaning, they won’t have to pay taxes.
The Trump administration has also raved that the new tax bill will encourage companies to invest in the United States rather than taking their jobs elsewhere. This is shown in the corporate tax rate, which will come down significantly. The top corporate rate will fall from 35% to 21%. The International Business taxation means that those companies that bring business ‘home’ rather than overseas will also get a tax break.
While the immediate affects of a new tax bill seem to be favoring to everyone, the long term affects of the bill that are being projected seem to hinder more than help. “The doubled standard deduction, the more generous child credit, the lower tax rates [are set] to expire after 2025…Changing the measure of inflation used for many tax calculations- would not expire. As a result, two-thirds of the middle-class households would get a tax increase in 2027, and none- zero percent- would get a tax cut. (NYT)”
While many did not expect the hasty signing of the bill on the 22nd of December, it still seems that there is much to be discussed on the major points that are being advertised across the board. The numbers that the White House are projecting claim that the tax cuts would pay for themselves, while independent economists would not go that far. The White House also projected there would be a 3% to 5% faster growth over the next decade, which is four times higher than the Joint Committee on Taxation estimated (Washington Post). Even the Federal Reserve Chair, “Janet Yellen cautioned that the country’s growing debt is, ‘the type of thing that should keep people awake at night’ (Washington Post).”