Taxes are one of the few certainties in life, and this makes them one of the most contentious political topics out there. Any small change has a ripple effect throughout the economy, and large changes can entirely reshape how much a family spends and gets back throughout the year. Add to that a president who is unprecedented in terms of controversy and you have a recipe for some heated debates. Donald Trump’s tax bill, known as the Tax Cuts and Jobs Act, is the saving grace of the middle class or the death of the American economy – depending on who you ask. Here are some of the most important arguments for Trump’s tax bill, and why it will benefit the economy and the middle class as promised.
The new plan still has seven tax brackets, but the income rates that fit into each bracket have changed, as well as the percentage that each bracket is taxed. While the impact on taxes owed varies greatly from individual to individual based on each taxpayer’s income level, amount of itemized deductions and other factors, economists believe overall that most Americans will owe less money with these new brackets than they did under the old system.
Many families, especially the middle class, will see their standard deductions (the portion of income that is not subject to tax and that can be used to reduce a taxpayer’s tax bill) close to double, rising from $6,350 for individuals to $12,000, and from $12,700 for married couples filing jointly to $24,000. This will bring these groups a change in their withholding on their paychecks as early as February, and a greater return when they file their 2018 taxes in the winter/spring of 2019. While many are arguing that the changes to itemization items such as the inability to deduct state and local taxes and the cap on the deductible amount of real estate tax, economists have stated that a vast majority of the country will be able to take the standard deduction route over itemization and keep more money in their pocket.
The Child Tax Credit will be doubling, bringing it up to $2,000 for dependents under 17, $1,400 of which is refundable (meaning if the credit is larger than your federal income tax liability, you can receive a refund of up to $1,400). There is also now a credit of up to $500 for other dependents, such as elderly relatives in your care or children over 17 that are still relying on you financially.
It is well known that one of the largest criticisms of the plan is that some of the breaks included in it also apply to the wealthy. However, many economics experts are stating that it is impossible to create tax breaks without somehow involving the upper class.
A 529 is a savings account dedicated to educational expenses. Parents put money, tax-free, into this account to accrue interest and save it for their child’s continued education when they come of age. Any withdrawal from a 529 that can’t be proven to go towards college expenses is penalized, and the account holder must pay the back taxes on the withdrawal. The new tax bill, however, makes some key exceptions to this law which will make the plight of middle class parents slightly easier.
The Tax Cuts and Jobs Act also allows parents to take up to $10,000 a year from a 529 and put it towards elementary and secondary school expenses at public, private or religious institutions. This means that parents whose children express a hesitance to attend college can take $10,000 a year and put it towards their secondary school education without facing tax penalties on income they were saving to better their child’s future. It also allows parents who fall on tough times during a child’s earlier years to use this money for their child’s primary and secondary education. This can prevent credit issues that would otherwise leave them unable to take out loans to fund college tuition later in life, even if their financial situation substantially improves.
Many families put money into a 529 at their child’s birth or in their early years, only to find out later that their child had developmental disabilities and was not suited for a traditional college education. One of the arguments for Trump’s tax bill is that contributions to a 529 plan can now be rolled tax- and penalty-free into a savings account for special needs children, allowing parents to put this money towards the many unexpected costs of raising a special needs child. They can also take $10,000 a year and put it towards elementary and secondary school education.
The housing market is a mess. There is no denying that. Prices have been on a steady increase for years. Many believe that this climb will be stalled by Trump’s tax bill. The tax code has long subsidized home ownership, especially for the upper middle class onwards. However, in order to pay for other tax cuts that are contained in the plan, the Tax Cuts and Jobs Act lowers the mortgage interest deduction and limits the state and local taxes, including property taxes, that can be deducted from the federal return. What exactly does this mean? Economists and housing experts concur that these changes will slow price increases in many housing markets. Many believe this will cause an increase in first-time home buyers who have become skittish with the increase in home values in recent years. “Existing homeowners have benefited from that on the backs of first-time home buyers,” said Edward Pinto, a housing expert at the American Enterprise Institute. There is no expected decrease in home value, so the overall consensus seems to be that sellers won’t suffer, but buyers won’t continue to be hung out to dry.
Many economists are relieved to see this included in the tax plan, as the government’s subsidies often made it easier for people to buy more expensive houses, and this is often cited as a major contributor to the housing collapse and the Great Recession in 2007. “In the past, the value of the housing deductions may have nudged people into buying homes even when they would have been happier renting,” Pinto said. He believes that the above changes, in conjunction with fact that the tax bill doubles the size of the standard deduction to $24,000 for a married couple, leaves the younger generation with more options. They will no longer feel pressured into buying for the tax breaks. “They get to make a choice about how to spend their money,” Pinto said.
One major criticism for the bill is that it benefits the wealthy just as much as, if not more than, the middle class. One case where this is not true is in changes to real estate taxes. The bill caps the deduction for state and local taxes at $10,000 a year. Currently, this deduction is unlimited. This means that those owning large estates where they pay over $10,000 a year in property taxes will lose out on a large tax deduction. However, these lost deductions are now feeding many of the more middle-class-friendly reforms contained in the bill. Similarly, mortgage interest deductions will be limited to $750,000 of indebtedness.
Another common criticism of the plan is the cuts in corporate taxes. One thing that is important to remember is that we’re not discussing taxes on the million dollar salaries of the CEOs, we’re talking about the taxes that the businesses themselves face. It’s also important to remember that not all businesses are big businesses. Small business will benefit immensely from this plan, and that will in turn positively impact the economy. While there is much contention over whether or not infusing larger businesses with tax will in fact trickle down, few dispute the fact that small businesses are a major contributor to the economy and that benefitting them benefits us all.
The US currently has the highest corporate income tax rate of all OECD countries. This bill brings the corporate tax from 35 percent down to 20 percent, which will bring us much closer to even with our trading partners. Many studies have shown that this tax falls primarily on workers. Anywhere from 25 percent to 100 percent of any business’ tax expenses are made up for by less payout to workers either in the form of salary or benefits. Therefore, supporters argue this cut benefits employees as much as, if not more than, it does the businesses themselves.
The lowering of the corporate tax rate left a big discrepancy in what independent contractors, who would be paying the personal tax rate, would have to pay out. To adjust for this, the new tax bill provides a 20 percent deduction to pass-through businesses, many of which are small businesses like landscapers and Uber drivers. As many Millennials are involved in what is becoming known as the gig economy, supporters of the bill believe this will help this financially-strapped generation get a foothold in today’s economy.
Miscellaneous Other Reforms
There are a few reforms that are beneficial to the general public and the economy at large that don’t fall under any overarching category. The Death Tax, which Republicans have been fighting to repeal for decades, will see a doubling of its exemptions. Citrus growers, who took a hard hit this year due to both Hurricane Irma and citrus greening disease, are eligible for a tax credit to replant damaged trees. Brewers and vineyards are also seeing a tax break in what is the first reduction in the federal excise tax on distilled spirits since the Civil War and the first reduction in wine excise taxes in more than 80 years. The bill also allows more families with heavy medical expenses to deduct those costs. The bill lowers the threshold for deducting those expenses to 7.5 percent of adjusted gross income, where it was previously 10 percent. The bill also reverses the current tax stance on alimony deductions to even the playing field. Previously, the tax law allowed the spouse paying alimony to deduct it, while the spouse who received the money had to pay taxes on it. The current bill will allow the spouse being paid the alimony to deduct it instead.
One of the most common criticisms of the plan is that the new tax brackets and many of the other reforms expire in 2025. Even those who generally oppose Trump but have supported aspects of this plan have spoken out with that as their biggest qualm. However, this is a common practice. Most tax reform bills have an expiration date, and must be re-voted on at that point in time. Therefore, many supporters of the bill find this criticism to be illogical. If the public and the government are satisfied with the reform come 2025, it will likely be reinstated. If not, then everyone will be thankful that it came with an expiration date.
- This Tax Bill Provision Helps Families Save On School Costs and Taxes – CNBC
- New Tax Law Expected to Slow Rise of Home Values, Creating Winners and Losers – Washington Post
- The Good, the Bad, and the Ugly of the GOP Tax Reform Bill – Washington Examiner
- 9 Tax Breaks In the New GOP Tax Bill – MoneyWatch
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