The Republican tax plan is out and you may be wondering, “How does this affect me?” Unfortunately, the details are scant. Before determining the impact on individuals, corporations and the nation’s balance sheet, the following questions must be resolved: INDIVIDUALS
- What are the income levels to which the new tax brackets apply? There would be three brackets - 12, 25 and 35 percent, with the possibility of adding a fourth to the highest income tax payers. What’s Missing: the breakdown of income levels to which the new rates apply.
- Will increase in standard deduction offset loss of personal exemption? The standard deduction would jump from the current $6,350 for individuals to $12K ($24K MFJ), so those who earn less would pay no taxes. BUT the plan also eliminates the personal exemption of $4,050 for taxpayers, spouses and dependents, which reduces taxable income. (The exemption phases out for single filers with AGI of $261,500 ($313,800 for MFJ). Larger middle class families may not see a reduction under the new plan may not fare well.
- What will the child tax credit be? The plan says that it would increase from $1,000 per child (limited to $75K for single filers, $100K MFJ) to an unspecified amount.
- What about the Earned Income Tax Credit? There was little mention of this valuable, refundable credit for taxpayers with earned income up to about $54,000
- Are the medical and dental (and a bunch of other) deductions gone? For the 30 percent of taxpayers who itemize, there was a high bar to deduct unreimbursed medical expenses: 10 percent of AGI for those under age 65, 7.5 percent for those above. The plan says it would only keep the write-offs for mortgage interest and charitable donations. Medical-expenses deduction would probably go and so too would miscellaneous deductions, which allowed the write off of tax-prep fees, job-hunting and business car expenses, and professional dues, if they totaled more than two percent of
- What about tax breaks for higher education, retirement and work? The plan only “encourages” Congress to maintain them--are they on the chopping block?
- Will the elimination of State and Local Tax (SALT) deductibility hold? Doing away with SALT would raise approximately $1 trillion, but there is already big pushback from Republican lawmakers in high tax states like CA, NY and VA. Will SALT survive?
- Will new plan abolish the step-up in cost basis at death along with the Estate tax? One way to make up for lost revenue associated with repealing the estate tax is to also eliminate the “step-up in cost basis at death”. This provision allows taxpayers the ability to leave any asset to an heir at the date of death valuation. So if your mother bought her home (or mutual funds) for $80K and when she dies it’s worth $300K, you would inherit the asset as if you purchased it for $300K. This is important because when you sell the home, you could do so without having to pay capital gains tax. Whereas the estate tax repeal would only impact less then one percent of taxpayers, a change in step-up would likely impact 99 percent of them.
- What will the rate be for repatriated corporate cash? The plan does not contemplate the reduced rate at which companies could repatriate their overseas hoard of cash, though a 2014 proposal called for 8.75 percent for cash and a lower rate for other assets, which could be paid over several years. Republicans say this is a way to create more jobs and to boost economic growth, but according to Eduardo Porter of the NY Times, “offering tax breaks to US corporations seems more likely to line the pockets of executives and shareholders than to improve their long-term prospects or the prosperity of their workers.”
- Will there be limitations to pass-through Income? Income earned from partnerships, S corporations, limited liability companies and sole proprietorships would be taxed at 25 percent, but new rules could limit the ability of individuals to recharacterize personal income/wages as profits. About 95 percent of businesses in the US are structured as pass-throughs and they generate a majority of the government’s corporate tax revenue.
BALANCE SHEET/ECONOMIC IMPACT
- How much will the tax cut cost? Early analysis from the Committee for a Responsible Federal Budget pegs the cost at $2.2 trillion over the next ten years, with $5.8 trillion lost to lower rates and other changes, and another $3.6 trillion recouped by eliminating deductions. Senate Republicans had said that adding $1.5 trillion to the debt would acceptable.
- What growth assumptions are factored in? Republicans say their plan would at least partly pay for itself by increasing economic growth to about 3 percent annualized, which is about a half of a percentage point above current levels. Economists in both parties are dubious about those claims.
Congressional Republicans need to pass a budget resolution that would allow a tax bill to pass the Senate with a 51-vote majority. Once the budget resolution passes both chambers, the tax-writing committees — Senate Finance and House Ways and Means — would begin drafting and amending tax legislation, where the REAL work begins.