Congress has passed the most significant tax legislation in over 30 years. What seemed impossible only a matter of months ago has become law. You have probably heard some details about this tax reform, but now we have a final bill to discuss. We will be discussing both the good elements of the bill as well as the trade offs and concerns and finally what these changes mean for everyday Americans.
Let’s start with the good. Eighty percent of Americans are forecasted to pay less taxes as a direct result of this reform. Positively affecting eighty percent of Americans is a very significant accomplishment. The other twenty percent are likely to see no real change or even expect higher taxes, but most Americans will pay lower taxes in 2018. The second positive change in this bill is the simplification of the filing process. About 90% of taxpayers are expected to be able to use a tax form that closely resembles a postcard. There has been a push for simplification and this bill delivers. Also, the estate tax exemption has been doubled, which is great news for business owners, landowners, and farmers. This change leaves less than 0.2% of Americans exposed to the estate tax. Other tax reductions are also being handed out to small business and those who earn “pass-through” income. Perhaps the most significant tax cut is being handed out to large corporations, effectively putting America back on equal footing with the rest of the world. This means that companies will be incentivized with lower taxes to keep their business in America. For some time, America has been at a severe disadvantage in this regard. Lowering the corporate tax rate from 35% to 21% will give America a compelling advantage on the world stage.
However, there are some trade offs. First, the standard deduction will be raised so that most people will not itemize their deductions. About 30% currently itemize their deductions, including business expenses, health expenses, and charitable giving. Most people will now utilize the standard deduction which means there will be less financial incentive to give to charitable organizations because it will no longer be able to be deducted. This may or may not affect these organizations that rely on donations. A second negative affect is that states with high income or property taxes will have that capped. States such as New Jersey, New York, or California, which have previously been able to fully deduct these taxes, will now be limited to a maximum $10,000 deduction. A third drawback is that these individual tax cuts might lapse if they are not renewed by congress. They will revert to current tax rates if Congress does not renew them in time, although the corporate tax cut is permanent. The final trade off is the unknown impact on the federal budget deficit. Certain conservative think tanks have estimated that this may add one trillion dollars to the deficit over the next ten years. The Republicans argument for a long time has been that cutting tax rates will boost the economy in such a way that it would actually increase overall tax revenue for the federal budget. The fact is there is no certain way to measure the future effect of this tax overhaul. Any argument in one direction or another is based on economic speculation, not certainty.
There are two more important elements that are either good or bad based on your perspective. One of those in the repeal of the Obamacare Healthcare mandate. You will no longer face a $2,000 penalty for not having personal health insurance. This was a signature component of Obamacare and Republicans are proud to have stripped Obamacare of one of its most important elements, the mandate for everyone in this country to have health insurance. Depending on your view of Obamacare, this is either good or bad news. The second element is the approval of drilling in the Arctic National Wildlife Refuge in Alaska for oil and natural gas. Certain proponents of energy are hailing this as a wonderful opportunity to keep oil prices down. Depending on your place in the environmentalism debate, this is either a good or bad component of the new law.
What can you do in response to the new tax plan? The first thing you can do is give generously before the end of the year. Consider accelerating your giving this year, perhaps, if able, giving money that you would have given in 2018 before 2017 has ended. This will increase the tax savings on these dollars.
Second, be strategic by considering accelerating your purchases this year, particularly if you are a small business. You will be able to get a more valuable deduction under the current year’s higher tax rate.
Finally, be realistic. This tax plan will not transform a suffering business into a thriving business. That being said, it could allow you to keep more money in your pocket, giving you more opportunity to spend, save, and give with wisdom. Realize that these savings may be temporary and not last forever.
HISTORY IN THE MAKING
The question remains as to the historical significance of this event. Will this event go down in history as a game changer for free markets, or will it go down in the books as a hand out to the wealthy elite. Both political parties have already begun posturing very differently for the mid-term elections in 2018 representing both of these viewpoints. Paul Ryan, who has been dreaming of a day like this ever since he came to congress, wrote an op-ed in the Wall Street Journal which closes by saying, “Moment like this come once in a generation. This is conservative reform at its best, applying our founding principles of liberty, limited government, and free markets to the most pressing challenges of the day” 1
Much of how this plays out depends on the American Public. If we use our savings in taxes to invest our money in such a way as to promote human flourishing in our society, we may just have a shot at a real paradigm shift for this country. Already, we have seen numerous large corporations handing out end of year bonuses to their employees, explicitly giving credit to the savings this new tax bill will bring to their companies. These kinds of acts matter and will help determine the perceived impact of this bill on normal, hard-working Americans.
*Please remember, this does not constitute specific tax advice. You will need to consult your own tax advisor for specific tax advice. If we can be of help to you in addressing any of your specific situations, we invite you to come and see us at a location near you or through our contact portion of our website.
1Ryan, Paul. “Tax Reform Means Your Paycheck Will Grow.” The Wall Street Journal, Dow Jones & Company, 19 Dec. 2017, www.wsj.com/articles/tax-reform-means-your-paycheck-will-grow-1513728131.