2017 Tax Reform – what’s in it for you?

2017 Tax Reform – what’s in it for you?
November 03 16:42 2017 Print This Article

After much fanfare, the House Ways and Means Committee revealed its tax reform plan on November 2. The question most people ask when there are changes proposed to our tax system is, “What’s in it for me?” Aside from those few who earn more than $1 Million a year and have significant commercial property holdings, most taxpayers will like the changes being proposed.

I’m going to break down The Tax Cuts and Jobs Act of 2017 (HR-1) into the categories of personal income tax, business taxes and global competitiveness.

Personal income tax. The standard deduction will nearly double to $12,000 for single filers and $24,000 for married couples filing jointly. The child tax credit will jump from the current $1000 per child to $1600. That means a family of 4 with $70,000 in gross income would only have a taxable income of $42,800, minus other deductions. It is calculated that a family of 4 with the median income would save about $1200 per year.

The tax brackets have been changed to lower the middle income rates. Families with up to $90,000 in gross adjusted income (after deductions) will pay the 12% rate. They are currently paying a rate of 15% or 25%. The new 25% bracket applies to gross adjusted income tax incomes up to $200,000 for singles and $260,000 for couples. The new 35% bracket applies to incomes up to $500,000 for singles and $1,000,000 for couples. The 39.6% bracket will stay in effect for singles earning more than $500,000 and couples above $1,000,000.

Despite speculation to the contrary, there will be no change in tax-exempt 401k plans. State income tax is no longer deductible and deductions for local property taxes will be capped at $10,000. Mortgage interest deductions will be capped for the first $500,000 of borrowing (down from the current $1,000,000). The Earned Income Tax Credit for low-income filers will remain in effect.

Business taxes. This tax change will have the biggest impact on the American economy. Our current corporate income tax rate of 35% is the highest in the industrialized world (the average rate is 22.5%). The high rate has led to what economists call corporate inversion, in which American businesses relocate corporate headquarters and manufacturing plants to other countries with lower tax rates. The 2017 tax bill would lower the corporate rate to 20%, the lowest since 1940. It also allows for an immediate deduction for equipment purchases, which will encourage plant modernization.

Corporate income tax generally has three effects – reduction of workforce and wages, increased production prices for goods and services, and reduced shareholder value. There are currently 54.8 million Americans who work for corporations. The lower corporate tax rate would likely lead to an expanded workforce and higher pay. It would lower production prices and make our exports more competitive. Stock shareholders, including retirement funds, should also benefit from the lower rate.

Small businesses which pay “pass-through” income tax on profits at the individual rates may benefit from the 2017 plan, although that is somewhat ambiguous. It looks like 30% of the profits will be taxed at a 25% rate and 70% will be taxed at the revised individual rates.

Global competitiveness. The current tax code requires all foreign profits by American corporations to be taxed at the 35% rate. Not surprisingly, little of the estimated $4 Trillion in American assets held overseas are brought back. The 2017 plan would reduce the repatriation tax to 12% for cash holdings and 5% for assets and extend that option over eight years.

One of the false arguments about tax reductions is that they increase budget deficits and debt. History tells us that they bring in more revenue by increasing economic growth. When President Reagan took office in 1981, federal revenue was $599 Billion. After massive tax cuts, the 1989 revenue figure was $991 Billion. President George W. Bush brokered modest tax cuts in 2001 and 2003 and revenue climbed from $1.99 Trillion in 2001 to $2.57 Trillion in 2007. As President John F. Kennedy (a tax cut advocate) said, “A rising tide lifts all boats!”