PL 115-97 (Tax Cuts & Jobs Act, sic)

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We really needed tax reform.  Instead we got HR-1, absurdly labeled as the Tax Cuts and Jobs Act, plus the Senate version of that same  bill,.  As I promised, they wouldn’t be passed as proposed (that would have been EVEN worse, they have been reconciled.   And , TheDonald has signed the final version, so it’s the law of the land.   PL 115-97.

I’ll let you decide how badly this will hurt the US economy.  (You haven’t missed that this bill ensures the deficit will exceed 115% of our GDP, the Gross Domestic Product.   Which means any downturn in the economy will put our entire nation’s stability at risk- and maybe, even so, without a downturn.)

Debt as a % of GDP

But, there is little reason to wonder what might have been- because it’s the law of the land.  Which means y’all (including me- or maybe that’s especially me) need to understand what provisions have been made to our tax filings.

It is critical to note that some folks assume that we are simply going to raise our national debt by $ 1.5 trillion with this bill.  But, more and more folks recognize that this is a back-door attack; the  GOP is to hit the poor and the aged up for the costs.   (There is a proposed $ 500 million cut to Medicare and another $ 1 trillion to Medicaid that will “pay” for this deficit augmentation.)

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

From Where Do Our Federal Dollars Come?

Consider this simple fact, too…the final version of the bill stipulates that SALT (state and local taxes- including real estate and property taxes) are only deductible up to $ 10,000 a year, regardless of how much you pay.   (This was the Senate verbiage, by the way; the House eliminated all SALT deductions.)   The House version also axed moving expenses, medical expenses, and tax preparation- but the Senate prevailed ONLY for medical expenses.  For this year only,  we can deduct those medical expenses that exceed 7.5% of our gross adjusted income.  (That’s actually better than was allowed before this new law was enacted- but it’s only for this coming year; by 2019, the deductibility returns to only expenses that exceed 10% of adjusted gross income.)

But, guess what?  If you are a FAKE person (i.e., a business)…  Yeah, you guessed it.  Business continues to benefit from these deductions.  Despite the claim that business tax rates would be reduced and the loopholes closed.  The only loops that I saw being found were on the personal side of the ledger. (By the way, that moving deduction is still available to businesses even if they are moving their operations offshore!)

Major Provisions PL115-87

Tax Rates

So, the first item is a “simplification of individual income tax rates”.  The House planned to ax the current 7 tax brackets to become four.  But, the Senate prevailed and the conference version still has 7 tax brackets, but they cut in at different incomes than we have in 2017, and with different marginal tax rates.

7 Tax Brackets of new Tax Bill

The section also claims there is an enhanced standard deduction.  This “enhanced” standard deduction would now be $ 24K for joint filers and $ 12K for individual filers (unless there is a qualifying child for that individual filer [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 of deductions.  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 that now obtains.

Uh-oh.  That AMT- the Alternative Minimum Tax?  It’s back, after having been removed in the initial bills.  Another way to sock it to the middle class.  The AMT exemptions (this means when they won’t take effect) for individual taxpayers are $ 70,300, for married filing separately they cut in at $ 54,700, and married couples and surviving spouses won’t be subject to AMT until their adjusted gross income exceeds $ 109,400.  The AMT phases out when married couples make more than $ 1,000,000 and $ 500,000 for everyone else.  (In other words, the 1% never gets hit with AMT.)

Which brings up 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 than they did this year. But 1/3 would still be paying more in 2018. Those taking the biggest hit? Families with children, to the tune of about $ 2K a year.

One of the good things about the compromise bill. It reinstated the $ 250 deduction teachers received above the line deduction (before the computation of adjusted gross income; moreover, this amount is now indexed for inflation)  for all those moneys spent to provide an outstanding experience for the students- that the school system never pays or reimburses the teachers.

Minimum Essential Health Coverage

Unfortunately, the final version of the act repealed the provision requiring taxpayers to have the minimum essential health coverage.  Not that the penalty was high enough in the first place, but now folks can game the system.  Given that pre-existing conditions no longer entail a penalty or preclusion from obtaining insurance, folks will wait until the last-minute (after they are sick) to purchase insurance, much to the financial cost of the health insurers.

Taxes on Pass-Through Entities

Then, there is the new deal for pass-through entities (including trusts and estates). Partnerships, sole proprietorships, S corporations, and LLC’s are among such entities.  Under the law, the pass-through income will receive a 20% deduction.  Only 80% of the pass-through income will be taxed (subject to wage limits and a few other exceptions).  (NOTE:  100% of the income- regardless of the 20% pass-through exemption will still be subject to the self-employment [Medicare and Social Security] taxes.)

Pass Through Taxes

(By the way, if your firm produces a loss, you, of course, receive no benefit for that tax year,  But, the loss also gets carried over to the next tax year- to lower the benefit you can receive that year!  Yes, if you lost $ 20K in 2018, and made $ 120K in 2019, that means you get no 20% reduction (because 20% of zero is zero) in 2018, but in 2019, you only get the 20% benefit for $ 100K ($120K minus the carried-forward $ 20K loss)

This pass-through benefit will phase out as one’s income exceeds $ 157,500 (and is fully removed by the time income exceeds $ 207,500) for non-married individuals.  Married couple’s limitations begin at $ 315K and are completely dissipated once the adjusted gross income reaches $ 415K.

Once those thresholds are met, there still is a special tax provision.   Oh, wait- that’s true only if you are not a lawyer, doctor, accountant, actor, athlete, artist, or stock trader. (Actually the law stipulates those operating in the fields of health, law, consulting, athletics, financial services, or brokerage services – or where the primary asset of the firm is the reputation or skill of its owners or employees- which means lobbying firms, too!)   If you are not on that hit list of “gotchas”, there is an additional extension of the 20% provision.  That write-off continues until you hit the greater of 50% of wages paid by your firm or 25% of the wages paid PLUS 2.5% of the unadjusted (original cost) basis of the capital assets of the entity.

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.

We’ll continue this discussion of personal tax filings tomorrow with more provisions and changes for the individual tax filings.  Next week, we’ll see what changes in business taxes are in store for this year.

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

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