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According to GOP advocates of the currently proposed tax code changes, the following are the "goodies" it offers to middle class Americans:
What is the impact of the GOP/Trump tax plan's provisions that affect low and middle income taxpayers? The short of it is that it pushes more people into taking the SD and giving up deductions that currently lower their tax liability, in turn, increasing their tax burden. Furthermore, to the extent one lives in a state that "piggybacks" off one's AGI or taxable income, as reported on one's federal 1040 form, as the departure point for calculating one's state tax bill, it's going to increase one's state tax burden, something I've only heard a handful CPAs and financial advisors discuss.
- Maintains the deferred-taxation status of the 401(k) contributions
- This isn't giving people anything they don't already have. I don't know why they're even touting this.
- Nearly doubles the standard deduction (SD) to $12K and $24K for single and married joint filers, respectively. The GOP are touting that doubling as though it's among the best things since sliced bread. (It's worth noting that among median income earners, one in five (20%) itemize rather than taking the SD and 30% of filers overall itemize.)
- Std. Deduction values for 2017:
- Single: $6,350
- Married filing jointly: $12,700
- Head of household: $9,350
- Now read the "fine print" on how the standard deduction increase is being implemented: "To simplify the tax rules, the additional SD and the personal exemptions for taxpayer and spouse are consolidated into this larger standard deduction." In other words, personal exemptions go the way of the dodo.
What's the math on that? Well, for a simple example, let's look at a single filer in the current 10% marginal rate taxable income (not gross income) bracket. Currently s/he would, assuming they don't itemize, would take the SD plus one personal exemption of $4,050, $10.4K total. If one is 65 or older, one takes an additional exemption bringing the total to $11.65K. Seems good, right? Give the single person a child. Personal exemptions don't exist in the GOP plan, so now that single middle income parent under the age of 65 is limited to a $12K deduction whereas currently they have $14,450 in SD plus exemptions. What share of American households are single parent households? 34%.
That's a lot of low and middle income folks who are going to be paying more. Who won't pay more, well, among middle income folks with kids, probably not many, but one has to read the rest of this section to see why.- The hurt doesn't stop there; instead it gets worse for low income people.
GOP leaders have the gall to state, "Typical families in the existing 10% taxable income bracket are expected to be better off under the framework due to the larger standard deduction, larger child tax credit and additional tax relief that will be included during the committee process."
The math above shows how that's simply not the case, but let's look at the insult that compounds the injury. Continuing with our 10% bracket filer who has one child and who took their $12K SD, because they are single and in the 10% bracket, we know their gross income must be, at most, $23,775. Under the current tax code, that "at most" taxpayer would pay, $932 ((23,775-14,450) x 0.10). Under Trump's/the GOP's tax plan, the 10% bracket is eliminated; thus our low income single parent would pay ((23,775-12,000) x 0.12) = $1,177. That's just shy of a 20% increase in that low income person's tax liability!
The short of this and the preceding bullet point in this section is that the GOP/Trump plan eliminates the personal exemption -- $4050 per person in a given household -- and provides nothing in place of it.- As if that weren't enough, the GOP/Trump tax plan gets rid of a number of other deductions.
- State and local tax deduction --> Gone in excess of $10K.
Right now, itemizing taxpayers who, for example, earn $100,000 but pay $20,000 in state income and local property taxes, have a $20K deduction. Say bye-bye to that. How much is that deduction worth? Well, let's see; I'm going to do the example for a single filer with one child and I'm apply only the things I've discussed so far -- SD and now this deduction.
- Currently:
- Gross income: $100,000
- Personal exemptions: (8100)
- Itemized state and local tax: (20,000)
- Less: Total deductions: $28,100
- Taxable income: $71,900 (putting the person in the 15% bracket)
- Tax liability: $10,785
- GOP/Trump Proposal
- Gross income: $100,000
- Less standard deduction: $12,000
- Taxable income: $88,000 (putting the person in the 25% bracket!!!)
- Tax liability: $22,000
- What does that mean? It means that just to break even with the current tax provisions, brackets and rates, that taxpayer has to come up with $11,215 in additional tax reductions in the GOP's/Trump's tax code.
- Deduction for medical expenses --> Gone. Whom do you know that's paying out-of-pocket to some extent (above the floor for this deduction) for something like nursing or elder care?
- Student loan interest deduction --> Gone. Who doesn't have student loan interest? People who are well-off enough not to have to take out student loans.
- Adds a family tax credit (FTC)
- I have yet to find any figures and provisions pertaining to just how much the FTC would be, how it'd be applied and to whom it would apply. The scuttlebut I've heard about it is that it would increase the child tax care credit by $600. Clearly given the math above, that's not nearly enough; it's at least $400+ not enough for a low taxable income taxpayer who is also a low gross income taxpayer.
- Caps the mortgage deduction for new homes at $500K
- I don't know why anyone thinks this is a good thing. It's going to hurt people on the high side of middle income who live in high COLA areas, and it's going to hurt the real estate industry, and its going to hurt mortgage lenders industry.
