New Tax Bill and What it Means to You

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Is the New Tax Reform Plan only for the Rich?

 

We have a new year and congress has passed a new Tax Reform bill that President Trump signed right before Christmas on December 22nd.  Before I get into the nuances of the bill and the essentials, I must fully disclose from the outset, that I am not an accountant nor a tax professional.  There are many details in the bill that make me cross eyed when I read it.  Math and numbers has not always been my strongest area, and I barely passed algebra and calculus, which I have completely forgotten and not used since High School.  I am more of a language arts person.   With that said, I believe it is important to know what is in the bill in terms of how it will affect all of us in the pocket book.   As a lay person, after studying the bill, I do think I have some basic understanding of the important changes and what it means, and I want to share what I know with you.

AVOID POLITICAL RHETORIC AND PROPAGANDA

There has been a lot of misinformation, political rhetoric, and propaganda thrown out about this bill and its subsequent affects.  The misinformation ranges from absurdity to genuine confusion.  First, let me dispel the myth that 1000’s of people will die.  Yep, there is an assertion that about 10,000 people will die from this tax bill.  What?  A tax cut bill will cause people to die?  Who believes that?  They can’t be serious, right?  Yet, it was said by an economist on Television!  Economist Larry Summers said on CNBC’s “Squawk Box” that roughly 10,000 more Americans will die each year if the Republican tax-reform legislation passes and includes a repeal of the Obama Care individual mandate.  He went on to say that he thinks this bill is very dangerous.  Summers served as former President Clinton’s Treasury secretary and former President Obama’s National Economic Council director.  He added that it’s hard to quantify the number of deaths precisely, but called an estimate that thousands will die because of the bill, “very conservative.”  This is the kind of hyperbolic nonsense that is floating out there and causes division.  And this man has the title “economist”, which makes him an expert in many people’s eyes.  Which is why I don’t believe every so called “expert” just because they have a   title attached to their name.   The Bible says we are to test every spirit.  1 John 4:1 says, “Beloved, do not believe every spirit, but test the spirits, whether they are of God; because many false prophets have gone out into the world.”    No one can predict the kind of doomsday scenario Summers proclaimed unless they are a prophet or have the gift of prophecy and foretelling.

Summers may be a fringe partisan that few people take seriously, but almost half of Americans believe the main primary argument against the bill that is being propagated by democratic politicians and the media.   That is that this is a tax cut for the rich and the middle class will get hosed.   There is a saying, “If you repeat a lie often enoughpeople will believe it, and you will even come to believe it yourself.”  My admonition is that, we as Christians, should be more discerning and not so quick to believe everything thrown at us in passing by media outlets.  So, let’s look at the bill and see if what they are saying is true.  In part 2 of this article, I will address whether the “tax cuts for the rich” mantra is really such an evil proposition.  But I digress.  Anyway, this is an important issue not only to us but to God.   Jesus said that we are to give to “Caesar” (the government) what belongs to him and give to God what belongs to God (Matt. 22:21).  In other words, the government has the right to tax us and to determine the rate.  Ultimately, whatever money we have belongs to God and he has mandated that we give the government what is owed them.  Jesus also said in Luke 16:9 -11:

And I say unto you, make to yourselves friends of the mammon of unrighteousness; that, when ye fail, they may receive you into everlasting habitations.  He that is faithful in that which is least is faithful also in much: and he that is unjust in the least is unjust also in much.  If therefore ye have not been faithful in the unrighteous mammon, who will commit to your trust the true riches?

In some sense, taxes can be thought of as part of unrighteous mammon, and we must be faithful in paying it.  We must also be thankful for any tax break and extra income we can take home because it is an opportunity to be faithful to God in how we use what’s left.

So, here is a comparison of the changes from the old tax code and the new code taken from wwwfactcheck.org

 

  1. Previous Individual Income Tax Rates

The previous tax rates and the thresholds.

Previous law: according to the IRS (see pages 7-9).

Single Filers
Tax Bracket Taxable Income 
10 percent Up to $9,325
15 percent $9,326-$37,950
25 percent $37,951-$91,900
28 percent $91,901-$191,650
33 percent $191,651-$416,700
35 percent $416,701-$418,400
39.6 percent Over $418,400

 

Married, Filing Jointly
Tax Bracket Taxable Income 
10 percent Up to $18,650
15 percent $18,651-$75,900
25 percent $75,901-$153,100
28 percent $153,101-$233,350
33 percent $233,351-$416,700
35 percent $416,701-$470,700
39.6 percent Over $470,700

 

New law: These will be the changes in brackets that individual taxpayers will use in 2019 for the 2018 tax year until 2025, described on pg. 200 of conference report.

Single Filers
Tax Bracket Taxable Income 
10 percent Up to $9,525
12 percent $9,526-$38,700
22 percent $38,701-$82,500
24 percent $82,501-$157,500
32 percent $157,501-$200,000
35 percent $200,001-$500,000
37 percent Over $500,000

 

Married, Filing Jointly
Tax Bracket Taxable Income 
10 percent Up to $19,050
12 percent $19,051-$77,400
22 percent $77,401-$165,000
24 percent $165,001-$315,000
32 percent $315,001-$400,000
35 percent $400,001-$600,000
37 percent Over $600,000

 

From this comparison, we see that the tax rates dropped on all levels and the thresholds increased, translating to more money in everyone’s pocket and we’ll see the extra money in our paychecks starting in February.  It could be anywhere from $50 to a few $100 depending on how much you make.  This extra money can be used for investments, savings, a retirement fund, supporting a cause or charity, or investing in a business.

  1. Standard Deductions

Previous law: The standard deduction for married filing jointly is $12,700 for tax year 2017; $6,350 for single taxpayers; and $9,350 for heads of households, according to the IRS.

New law: The standard deduction for married filing jointly would increase to $24,000 for joint filers; $12,000 for single taxpayers; and $18,000 for heads of households, according to the TPC analysis.

The standard deduction is the amount that you can deduct from your income before calculating your tax liability, if you do not itemize your deductions.  The threshold for standard deductions are almost doubled, which also means more refund money.  This mostly benefits lower income earners.  It may be more profitable for higher income earners to itemize, depending on whether they can claim mortgage interest deduction, education, medical bills etc. and whether they amount to more than your income threshold for the standard deduction.

 

  1. Personal Exemption

Personal exemption is the amount that you can deduct from your income for every taxpayer and most dependents claimed on your return.

Previous law: $4,050 per person, which means a married couple with two dependents would receive a personal exemption of $16,200.

New law: The personal exemption is eliminated. The exemption returns after 2025.

The elimination of the personal exemption may be a loss especially for single parents, however, the doubling in the child tax credit may offset this loss.

  1. Child Tax Credit

Previous law: Married couples filing jointly who earn less than $110,000 can receive a tax credit of up to $1,000 for each child under 17 years old that they claim as dependents on their tax returns ($55,000 is the threshold for married couples filing separately; $75,000 for single, head of household, and qualifying widow or widower filers). (See the TurboTax FAQ on the tax credit for more details.)

New law: The credit would increase to up to $2,000 per child, and the first $1,400 would be refundable according to the TPC analysis, meaning the credit could reduce your tax liability below zero and you would still be able to receive a tax refund. The cut off for the tax credit would increase from $110,000 to $400,000 for married couples filing jointly.

  1. State and Local Tax Deductions

This is the most controversial change in the bill, and has been used as a fear mongering tactic to cause unnecessary panic and concern.  Here is the truth.  Although there is a cap, it will mostly have little impact on the average household.

Previous law: Taxpayers who itemize their taxes can deduct state and local property and real estate taxes, and either state and local income or sales taxes. For more information, see “The Facts on the SALT Deduction.”

New law: The SALT deduction will be capped at $10,000. The deduction limit ends after 2025.

According to “The Facts on the SALT Deduction”, this would mostly effect those making over $200,00 because the average amount claimed for taxpayers with incomes above $200,000 was $10,250,” the TPC says, with higher averages in some states.   Income earners making less than $200,000 claimed about half of the $10,000.   So many of the concerns and worry about this cap is overstated and overblown.  Many tax-payers will still be able claim their State and Local tax deductions without a loss or increase in tax liability, even those from the higher-income and high-tax states like California, New York, and New Jersey.  If you make less than $50,000 then it would be best to just take the standard deductions, as itemizing state and local taxes would be of no benefit.

  1. Mortgage Deductions

Previous law: Taxpayers who itemize their taxes can deduct interest payments on mortgage debt of up to $1.1 million. That includes up to $100,000 of home equity debt.

New law: For current mortgage holders, there is no change. But the deductible limit drops to $750,000 for new debt incurred after Dec. 31, 2017. Also, homeowners may not claim a deduction for existing and new interest on home equity debt, beginning Jan. 1, 2018. The mortgage deduction changes expire after 2025.

Just like the State and Local tax deductions, not much change for the average tax-payer.  We will still be able to claim mortgage interest deduction, which has been a huge benefit and help to many homeowners.

  1. Other notable changes include:
  • Medical Expense Deduction decreases from 10% to 7.5% of their adjusted gross income
  • Limits on Itemized Deductions are repealed.
  • No changes in the Capital Gains Tax Rate – Capital gains are the profits realized from the sale of assets such as stocks or real estate. Now, this has also been used as proof that this bill favors the rich.  Although, this provision does appear to favor wealthy investors, it must be noted that this provision has been part of the code for many years and it is untouched.  With an accountant there are ways for the wealthy to pay zero on capital gains.  So, this does pose a problem in terms of public perception.
  • The value for the 40% Estate Tax doubled from more than $5.49 million (nearly $11 million for couples) to $11.2 million ($22.4 million for couples). This is a relief and good news to struggling farm owners and family businesses.
  • The Top Corporate rate is reduced from 35% to 21%. This will be passed down to the middle class and will be a great benefit and boon to the economy.  I will discuss this further in part 2.

Overall, this will be a huge benefit to every American and we all win.   Let’s use the extra money we will receive wisely to improve ourselves and help others.   Watch the following video to see how three average American families from different socio-economic statuses and states will benefit from the new tax bill.

How the tax bill will affect the returns of three American families

 

 

 

Deborah Isaacs