Explaining the Basics of the GOP Tax Plan

President Donald Trump gave the American people a “ big beautiful Christmas gift ” on December 22 when he signed into law a tax plan that will benefit business owners big and small and give individual taxpayers a little respite in 2018.

The GOP has failed to deliver on its promise to simplify the tax code – you won’t be able to file tax returns on a postcard anytime soon, and experts say changes in business rates are likely to force more people to try to cheat the system. But they changed the number of tax brackets from seven to … seven and canceled some popular deductions .

When will it take effect

The tax plan goes live on January 1, 2018, meaning it doesn’t affect taxes you file in April 2018 (unless you take a few steps at the last minute ). Some aspects of this won’t be implemented until 2019 or later.

For example, starting January 1, 2018, tax brackets change to the following:

The IRS announced that workers could begin to see the difference in keeping their wages as early as February. The new brackets expire after 2025. As Mark Goldwein, senior policy director of the bipartisan committee on responsible federal budgeting, told Vox , “The people will have eight years of tax reform.”

The individual mandate for health insurance will be canceled starting in 2019, which means that if you do not purchase health insurance next year, you will still incur a penalty. The Congressional Budget Office estimates that 4 million fewer people will have health insurance in 2019, and 13 million fewer in 2027.

Tax cut you can expect on average

Republicans hail the bill as a major victory for the middle class. The middle class will benefit from this in the near future, with all income groups receiving an average cut in 2018, according to the non-partisan Center for Tax Policy , which estimates the average cut will be $ 1,600 in 2018 .

How it works?

  • Standard Deduction: For many people, the standard deduction will be substantially doubled, from $ 6,350 for individuals to $ 12,000 and from $ 12,700 for joint applicants to $ 24,000. You won’t see this change until you file your tax return in April 2019.
  • Child Tax Credit: Another benefit for many middle-class workers is the doubling of the child tax credit to $ 2,000 for dependents under 17, of which $ 1,400 is refundable (that is, if the loan amount exceeds your federal income tax liability, you can get a refund up to $ 1400). Now more people with high incomes will apply for this loan. It expires in 2025. (You can also reduce your tax bill to $ 500 for other dependents, such as children over 17 and elderly relatives.)
  • Personal benefits: Personal benefits that reduce your taxable income are canceled. You are currently allowed to claim a personal exemption of $ 4,050 for yourself, your spouse, and your family members (up to a certain amount ). Doubling the standard deduction can offset this a lot, but canceling it could negate benefits for families with three or more children.

But the bill is a big boon for the wealthiest Americans and business owners. One of the main criticisms of the plan is that tax cuts are unevenly distributed across the entire revenue spectrum. Taxpayers earning between $ 308,000 and $ 733,000 will receive the largest tax cut. According to TCP , middle-income taxpayers (those who earn between $ 49,000 and $ 86,000) will pay about $ 900 less (or about 1.6% of their after-tax income) in 2018, while those who earn $ 733,000 and up will receive an average tax cut of about $ 50,000 (or 3.4% of their after-tax income). If you make $ 65,000, you will save about $ 930 in 2018 on TCP . If you make $ 500,000, you will save about $ 13,480.

An exception for wealthier people who receive a disproportionate benefit is that state and local tax deductions (also known as SALT) on the account are capped at $ 10,000 (including income and property taxes). Currently unlimited. If you are a wealthy person in a blue state with high state and local taxes (such as New Jersey or New York), you may lose some of this tax credit.

The very rich also benefit from the inheritance tax change. The $ 5,490,000 estate currently pays 40% federal inheritance tax (0.2% of the estate was affected in 2013, or about 4,700 of the 2.6 million deaths in the United States). Now estates up to $ 10 million will be tax exempt. So if you’re going to inherit a property worth between $ 5.5 million and $ 10 million, congratulations on the new tax credit.

This is good news for business. Next year, the corporate rate will drop from 35% to 21%. Additionally, individuals will be able to deduct 20% of their qualified business income from partnerships, S corporations, or sole proprietorships (also known as pass-through income ).

Corporate tax cuts are permanent, while personal reserves will expire after 2025 (Republicans have said they will resume them when the time is right). The Center for Tax Policy estimates that by 2027, 53% of people will actually pay more taxes.

How will the tax bill be paid

The bill adds more than $ 1.46 trillion to the deficit over ten years, with little or no mechanisms to offset those losses, according to the Nonpartisan Joint Tax Committee.

House Speaker Paul Ryan has long wanted to cut welfare programs and continue “benefit reform,” which means cuts in Medicare and Medicaid, and said he would consider them to cut the deficit. Senator Marco Rubio also said that health care and welfare would need to be readjusted to cover the deficit created by tax cuts “in a way that does not affect current retirees or people about to retire, but in a way that will probably affect me and people younger than me. ” (Trump has repeatedly stated that he will not touch the programs.)

This is another criticism of the bill: it is true that the average person will receive a cut of $ 1,600 in 2018. (You can use this calculator to better understand how this will affect you.) But it is also true that if the widening deficit resulting from this bill is used as a reason for restructuring social security and health care, young people are likely to lose much more than $ 1,600.

Consideration should also be given to canceling the individual mandate. The CBO estimates that poor people will end up paying more than the tax credits they receive because “the average premiums in the individual market will rise by about 10 percent” as healthy people drop coverage. For a non-subsidized family of four, this translates into a $ 1,990 increase in premiums annually to cover the basic plan, according to the Center for American Progress.

The effect of this can be seen in the table above, where positive numbers indicate an increase in taxes or spending: the poorest will spend more, and the richest families will get the most of the income.

How will this affect the economy

Proponents of the bill swear that corporate tax cuts will overload the economy, prompting businesses to raise wages and reinvest in the United States. Many people are rightly skeptical about this.

Some companies have announced one-time bonuses to certain employees after the bill was passed, paying a tax bill based on their ability to do so. The truth is, as always, more complicated. For example, just as AT&T gave away $ 200 million in holiday bonuses last week, it is potentially cutting thousands of jobs . And a bonus is not the same as a raise.

As said CEO of Wells Fargo Tim Sloan, a reduction will benefit shareholders and investors in the form of payments to shareholders. In fact, executives have already told us what they would do with the money they save and that they would not invest in their employees: This summer, over 300 American corporations hosted by Bank of America Merrill Lynch asked what they would do if tax laws allowed them to return money held overseas back to the United States at a low tax rate, as stipulated in the bill. The most popular answers were: debt repayment, share buybacks, and mergers.

Thus, older and wealthy people who make money from investments will be doubly lucky: they will benefit without facing any consequences of downsizing in the future. For younger Americans, it won’t shake things up either.


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