Federal tax cuts traditionally pay a price. Practically gratuitous over the last 18 years, tax cuts continue their dubious tradition with the final passage of a tax reform bill by the U.S. Congress in January—but only after two government shutdowns.
Since such taxpayer relief started, the national debt and its incumbent reflex to raise the debt ceiling every few years continues to foment a lot of head-scratching among not only lawmakers, but “we the people,” to whom they serve.
This last tax cut poses the same conundrum as past ones: What will it mean to John. Q. Public’s pocketbook by the time the next meal greets the dinner table, and what will it mean for your children and their children at the dinner table in 20 or more years?
Based on the premise of now and later, let us take a look at the most recent iteration of so-called tax resolution as it relates to our own income taxes, our deductions, and our tax credits.
Congress decided to essentially start from the top by adjusting the percentages of income tax people should pay in their respective income brackets, just as in 2017. Remember, however, the new tax rates for we the people—individuals, married couples, and heads of households—came into effect as of January this year. Therefore, the new rates will not be applied until you pay taxes in 2019 for the year 2018.
Here is how it all stacks up in terms of approximate tax rate per gross income bracket in the most common filing modes:
INDIVIDUALS for Tax Year 2017
—10 percent on income up to $9,525
—15 percent on income between $9,526-$38,700
—25 percent on income between $38,701-$93,700
—28 percent on income between $93,701-195,450
—33 percent on income between $195,451-$424,950
—35 percent on income between $424,951-$426,700
—39.6 percent on income in excess of $426,700
INDIVIDUALS for Tax Year 2018
—10 percent on income up to $19,525
—12 percent on income between $9,526-$38,700
—22 percent on income between $38,701-$82,500
—24 percent on income between $82,501-$157,500
—32 percent on income between $257,501-$200,000
—35 percent on income between $200,001-$500,000
—37 percent on income in excess of $500,000
MARRIED/JOINTLY for Tax Year 2017
—10 percent for income up to $19,050
—15 percent on income between $19,051-$77,400
—25 percent on income between $77,401-$156,150
—28 percent on income of $156,151-$237,950
—33 percent on income of $237,951-$424,950
—35 percent on income of $424,951-$480,050
—39.6 percent on income in excess of $480,050
MARRIED/JOINTLY for Tax Year 2018
—10 percent for income up to $19,050
—12 percent on income between $19,051-$77,400
—22 percent on income between $77,401-$165,000
—24 percent on income of $165,501-$315,000
—32 percent on income of $315,001-$400,000
—35 percent on income of $400,001-$600,000
—37 percent on income in excess of $600,000
In all, income tax rates reduced in each income bracket except the lowest, while income brackets changed in all cases, except for the lower two brackets.
The standard individual deduction for tax year 2018 amounts to $12,000 compared to $6,350 in 2017. Married filing jointly will see their deduction rise from $12,700 to $24,000.
In general, the tax rates and deductions result in good news for taxpayers in the individual and married (jointly) statuses. They result in exceptionally good news for those who made roughly $500,000 in 2017 and expect to make the same amount or greater in 2018.
Keep in mind, however, that the newly passed changes in rates are scheduled to end in 2025.
So… What About the ACA (Obamacare)?
Despite all the rhetorical, combative discourse about the Affordable Care Act (ACA) and the effort put forth by the president and Congress to repeal it, the ACA found a second life of sorts.
This means that the mandate to carry an insurer will indeed end, but not until you file taxes in 2019. Additionally, so far, the only major part of the ACA to be abolished is the mandatory mandate.
Just like individuals and couples filing jointly, the new tax law greeted corporations with some good news. Many argue that it is too good. In general, the corporate tax rate will dive from 35 percent in tax year 2017 to 21 percent in tax year 2018.
It is indeed the largest tax cut in the new law and unlike the rate for we the people (though by Supreme Court edict corporations are people by law), this reduction is permanent, not set to expire.
The alternative minimum tax, seen somewhat as a loophole for big business, however, disappears in tax year 2018.
For small businesses, expensing (or spreading out your operating expenses) extends from $500,000 in 2017 to $1 million in tax year 2018. The aim of Congress in this case is to provide some elbow room for developing startups and such.
Net operating losses were tweaked to raise money by shortening the period over which a corporation can deduct net operating losses.
Similarly, research and development expenditures will no longer qualify for immediate deduction in tax year 2018. They must be written off gradually over a longer period of time.
As for business credits, most stay the same except for the orphan drug tax credit, which lowers from 50 percent of qualified testing expenses to 25 percent.
In terms of international taxes for businesses in the U.S., corporations again receive a bit of a break. The bill exchanges a worldwide tax system for one that treats income from abroad as territorial income in which only profits from the U.S. are taxed, rather than income from abroad.
The Price Tomorrow for Tax Cuts Today?
By most economists’ estimates, the total sum of cuts will bring a short-term injection to our economy, but its size and duration may not amount to the projections touted by the president and the majority in Congress.
According to a Business Insider article, the Joint Committee on Taxation (JCT), deemed the scorekeeper in Congress, claims the new law will boost GDP growth by less than 1 percent annually over the first 10 years or about .08 percent each of those years.
According to the article, the Goldman Sachs and Penn-Wharton Budget Model predicts similar if not lower results in the growth of the GDP.
Most also agree that the growth will begin to fizzle away after 10 years if not sooner. In fact, the Business Insider piece says Goldman Sachs believes the humble boost to the GDP might start dissipating as soon as 2020 to conversely become a drag on the economy. However, the JCT disagrees and insists such a dive will not occur until after 10 years.
Meanwhile, you should keep seeing plenty of opinion pieces, news articles, and analyses predicting the ramifications of this $1.5- $1.7 million tax cut.
What’s the Public’s Take on the New Tax Law?
The public perceives the new tax law in somewhat conflicting terms. The New York Times most recently cited Survey Monkey findings that indicate 51 percent of Americans now approve of the tax law as opposed to 37 percent when the law was cutting its teeth in Congress.
However, only one in three Americans think the new law will result in overall decreases in their taxes, according to a Times poll.
In spite of lawmakers’ claims that the substantial corporate breaks will result in a trickle-down effect that will boost the economy by providing bonuses and raises for workers, the public doesn’t seem to agree, according to the poll. Less than one in five respondents believe they will see a raise or bonus due to the tax cuts.
The experts’ take on these conflicting messages from public opinion polls is that the trickle down is overestimated and the amount of tax reductions to John Q. Public are being underestimated.
What Does the New Tax Law Do to Our Future Taxpayers?
Tax cuts in effect reduce the amount of operating money the federal government receives, especially when the percentages of taxes from the very wealthy fall at a rate that remains permanent. The question then becomes, “What will this mean for future taxpayers?”
Aside from the deficit issue, the new tax law drew much controversy in its original form in regard to college tuition payments. It proposed dropping many extensions and benefits related to paying off debt among other measures that added economic stress to the collegiate and college-bound.
Fortunately for students and their career aspirations, Congress decided to leave almost all student-related tax benefits untouched. For example, the deduction for student loan interest remains intact. Tuition waivers for graduate students also remain tax free, according to a U.S. News report just after the law’s passage.
The U.S. News article goes on to say such tax benefits as the Lifetime Learning Credit and American Opportunity Tax Credit remain in place.
All this said, the means parents find to help fund their kids’ education must change in some instances, according to the new tax laws.
For instance, deductions for interest on home equity loans and lines of credit disappear, at least until 2025.
The U.S. News quotes a Southern California CPA at Holthouse, Carlin, Van Trigt, Blake Christian about the effect of such changes. “(This will) prevent many middle-income taxpayers from using home-equity loans in the future to fund college tuition, while generating tax-deductible interest.”
Meanwhile, the new law includes a benefit to help parents pay for grades K-12 tuitions, according the article. Commonly referred to as 529 plans, families can now use qualified education expenses in a savings account that receives tax credits. In effect, the new law allows taxpayers to receive tax credits on up to $10,000 per year in elementary and secondary education tuitions.
However, critics cite that such a credit may encourage parents to spend much of the savings during K-12 education instead of on college tuition, especially in the case of private K-12 education.
On the other side of the educational equation, that of college administrations, the new tax act in effect penalizes institutions by levying a new 1.4 percent excise tax on a private educational institution’s endowments when they amount to more than $500,000 per student. Harvard, Notre Dame, and Stanford are among the number of institutions affected, according to the U.S. News article.
The article cites breaks for outstanding debts on death and disability, as well as the elimination of taxes on alimony payments as ways the new law aids students and their parents.
In all, the final verdict on this new tax law will, of course, be served in the coming years.
Those hoping the new tax laws would make taxes less confusing—especially those who traditionally advocate a flat-tax schematic—will definitely find this new tax law terribly lacking in this regard.
Those looking to see more substantive proof of the alleged trickle-down effect in compensation for the new law’s tremendous increase in national debt will need to wait and see if there is proof in the pudding, as it were.
As in all laws, though, the same old axiom we’ve heard throughout our political history remains intact: “What Congress giveth it can taketh away.”
So, we should all keep our seatbelts on.