Form 1040 (Income Tax)

HR 1

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Let’s reiterate what I said yesterday– I don’t expect this bill to pass.  Certainly not the way it was presented in the bill.  These posts were written on 2 November- when the bill was published.  Since then, the House has proposed changes to its own bill.  And, 1 week later, the Senate published a slightly different version- which means that I will be adding to this series to contrast the differences between the two bills.  (This series that was 5 blogs will now be 7.)

But,  it is critical to assess the thinking (sic) of the Congressional leadership.  Because both individuals and businesses have to plan ahead.  To ensure continuity, to ensure liquidity.  (Yes, I know that those in the bottom 20% are more worried about from where their next meal may be coming or when that next sale comes over the transom.)

While HR-1, absurdly labeled as the Tax Cuts and Jobs Act, was purported to be tax reform, I’ll let you decide.

It is critical to note that some folks assume that we are going to raise our national debt by $ 1.5 trillion with this bill and others assume that we really are going to hit the poor and the aged up for the costs.   (There is a purported $ 500 million cut to Medicare and another $ 1 trillion to Medicaid that will “pay” for this deficit augmentation. )

Who gets that $1.5 trillion?  Corporations get 2/3 of it.  Yup- $ 1 trillion in cuts to a sector that doesn’t even contribute 10% of the federal coffers.  The rich (the top 1% match the bottom 40% in garnering some 15% each of the total personal income in the US; the 1% also has as much wealth as the bottom 90%) will be getting most of the rest of the benefit (as explained yesterday).

Consider this simple fact, too…HR-1 stipulates that SALT (state and local taxes), moving expenses, medical expenses, and tax preparation will not be deductible on our personal tax returns.  But, if you are a FAKE person (i.e., a business)…  Yeah, you guessed it.  Business continues to benefit with these deductions.  Despite the claim that business tax rates would be reduced and the loopholes closed.  The only loops that I see being found are on the personal side of the ledger. (By the way, the moving deduction is still available to businesses even if they are moving the operations offshore!)

Tax Rates

So, the first item is a “simplification of individual income tax rates”.  The current 7 tax brackets will become four- 12%, 25%, 35%, and 39.6%.  Assuming one is married, the 25% bracket kicks in at $90K, the 35% bracket begins at $ 260K, and the 39.6% hits those with $ 1KK of TAXABLE (remember, it’s never gross) income.  It’s half those levels for singles or if married folks are filing separately.  There still will be a head of household bracket that’s halfway between singles and marrieds, except the 39.6% cuts in at $ 500KK, as well, for those folks.

Single Filers, New Tax Brackets

The section also claims there is an enhanced standard deduction.  This “enhanced” standard deduction would now be $ 24K for marrieds and $ 12K for individual filers, unless there is a qualifying child (then it’s $ 18K).  Why did I say claims?  Because the standard deduction now replaces the combination of personal exemptions and the standard deduction.  So, if you are single or head of household with one qualifying child, you do gain about $ 2K.  But if one is married and has two kids, the previous reduction to gross income was more than $ 28K, which is considerably higher than the “enhanced” version.

Married Taxpayers, New Brackets

Some more real facts.  In 2026, some 45% of those in the middle class (family income ranging between $ 50K and $ 160K) would be paying higher taxes should this bill pass. But 1/3 would be paying more next year, when it is first instituted. Those taking the biggest hit? Families with children, to the tune of about $ 2K a year.

Then, there is the new deal for pass-through companies. Partnerships, sole proprietorships, S corporations, and LLC’s are such firms.  Under the proposed tax law, the pass-through income will never be taxed at a rate exceeding 25%, regardless of the tax bracket.  (Please realize that this is NOT a hard and fast rule.  It’s only a talking point used by the proposers.  We’ll discuss this later in the series, when we talk about business taxes.)  Now is when you should recognize that the proposed top bracket of 39.6% (and to a large extent the 35%) will only apply to the Fortune 500 executives.  Because most of the 1% get their income from pass-through entities.  Which net profits will now be taxed at 25%.

Corporate executives (those running our public corporations) make their income via excessive (and not in just my far less than humble opinion) salaries.  Which means that portion of their income will not be subject to a tax cut.  (As you will see next week, as we talk about the business portion of the bill, corporations will finally have to rethink those stock options and stock bonuses they provide.  These will finally no longer will be tolerated, since such payments would now be included in the $ 1 million deductible compensation rule.)

Moreover, HR-1 makes changes to the tax law so that it’s more important to consider how one makes one’s money.  Not how much money one makes.  Professional corporations (doctors, lawyers, accountants, etc.) are not getting any rate changes, either.  They have been (and would remain) set by code via the 35% bracket.

Child Credit

Currently, the child tax credit applies to those whose taxable income is below $ 75K (singles, but $ 115K for marrieds).  Once the $ 75K limit is reached, the credit is reduced by $ 50 for each $ 1K of additional income, which means the credit is gone completely for those with taxable incomes of $ 95K ($135K for married).

The current credit is $ 1000 [and can actually be a refund if one’s tax liability is low (to the tune of 15% of earned income in excess of $ 3000)].  The credit will be increased to $ 1600 under the proposed plan.  And, the phase out limit will be raised to $115K (or $230K for marrieds).  There also is a $ 300 tax credit for each non-child dependent added to the mix.

Using this new proposal, a family of four would be entitled to $3800 in tax credits (maximum), as opposed to $ 2000 under the current law.  This could ease the problem developed by removing personal exemptions ($4050 per person) and changing the standard deduction ($12000) to $ 24000.  The $ 4200 of additional taxable income, assuming all the credits are earned, could be counterbalanced by the new tax credit.

Special Credits

For those over 65 who were entitled to credits ($5K for singles, $7.5K for marrieds) on their retirement or disability payments will no longer receive  that 15% tax credit on those funds.

Nor will there be an adoption credit ($ 13,750), or private activity bond credits.  (While  this wasn’t a credit, the funds used by employers who help pay for adoptions by their staff will now be taxable income to the employee.)

The education benefits (with a plethora of different names and provisions) shall be coalesced into one credit.  The new version of the education credit will be 100% tax credit for the first $ 2K of qualified expenses and 25% for the next $ 2K.

Coverdell Savings Accounts that can cover some educational expenses would no longer be allowed.  Oh, sure, they would remain- but you can’t add any money to them.  And, you can roll them over into 529 plans.  What HR-1 has really done is make 529’s more like the terminated Coverdells, since 529 plans can now be used for elementary and high school educations (up to $10K of tuition is covered), as would be apprenticeship program tuitions.  And, unborn children can be beneficiaries, now.  (Gotta love it when we worry more about the unborn- since they are abandoned once these fetuses breathe life.)

When student debt is forgiven by the lender, it has been charged as income to the taxpayer.  Under HR-1, there will be a slight break.  Disabled taxpayers who get the debt forgiven or folks who die and have the debt forgiven will have no tax consequences.

Interest on student debt payments would no longer be deductible.  And, for lower-income ($ 65K for singles and $ 130K for married) taxpayers, there no longer will be a $ 4K above the line (maximum) deduction for tuition and fees; nor will the lower deduction of $ 2K above the line apply to those making slightly more money (but less than $80K ($160K for marrieds).

And, the electric car credit is terminated.  (Admittedly, both Tesla and GM are reaching the maximum credit levels [200K cars sold] of the program. ) Consider this- when the Georgia state credit expired, electric car sales dropped from 1400 a month to barely 100.  Extending this lost credit scenario to the whole US means that car manufacturers are going to lose even more money per car (since some states mandate a set number of electric vehicles to be sold).  Right now, it seems Tesla is losing a ton on each car (with investment included, the total loss per car is more than $ 50K) and GM is losing $ 9K per Volt sold.  Not a good foreboding for zero emissions vehicles.  [By the way, coal won’t work for car propulsion (unless it’s converted to natural gas or some other fuel type).]

Monday, we’ll continue the changes to personal tax returns, starting with the potential changes to itemized deductions.

Roy A. Ackerman, Ph.D., E.A.

By the way- tomorrow is Veteran’s Day.  And, I don’t publish on Shabat.  But, y’all can read my post from last year, because Veteran’s Day (or Armistice Day) deserves all of our consideration.


The Entire 7 Part Series on the “Tax Reform & Jobs Act”
Personal Taxes, part 1 
Personal Taxes, part 2 
Grad Students, private colleges
Biz Taxes, part 1
Biz Taxes, part 2 
Senate’s version changes 

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