Overview

For months, the nation has been anticipating the contentious GOP tax plan that will significantly alter the tax code. The Republicans claim that this bill, titled the Tax Cuts and Job Act of 2017, will cut taxes and make the tax code more straightforward. According to President Donald J. Trump, the tax plan is, “a once-in-a-generation opportunity.” [1]

On Thursday, November 15th and Saturday, December 2nd, the GOP tax plan passed the House 227-205 and the Senate 51-49, respectively, in a party-line vote. After the two bills were passed through both chambers, Republicans compromised on a bill that unites the two versions. This finalized bill passed both chambers of Congress on 12/19 and 12/20, and was sent to the President to sign.

Republicans, including Trump, claim that the tax plan is widely popular among Americans. [2] However, a recent Gallup poll found that 56% of American adults disapproved of the tax plan, 29% approved, and 16% had no opinion. [3]

Details

The Tax Cuts and Job Act of 2017 provides for major changes to the way individuals and businesses pay their taxes. [4]

Individual income tax changes [5]

The standard deduction is increased from $6,500 to $12,000 for individuals, and from $13,000 to $24,000 for couples filing jointly (deductions are subtracted from the total income, and the amount left is taxable). However, the increase in the standard deduction will expire at the end of 2025, unless Congress extends it.

The maximum child tax credit for children under 17 is increased from $1,000 to $2,000 (credits are subtracted directly from the amount of money owed as taxes). Singles with income less than or equal to $200,000 and married couples with income less than or equal to $400,000 have access to the full $2000 credit. However, only $1,400 of the child tax credit will be refundable, meaning that if the taxpayer owes zero income tax, the $1,400 would be sent back the to the taxpayer.

The seven tax brackets are changed to 10%, 12%, 22%, 24%, 32%, 35%, and 37%. These rates will expire at the end of 2025, unless Congress extends them. The first $9,525 ($19,050 for married couples filing jointly) of taxable income is taxed at 10%. The next $29,175 ($58,350 for couples) of taxable income is taxed at 12%. The next $43,800 ($87,600 for couples) of taxable income is taxed at 22%. The next $75,000 ($150,000 for couples) is taxed at 24%. The next $42,500 ($85,000 for couples) is taxed at 32%. The next $300,000 ($200,000 for couples) is taxed at 35%. The rest of the taxable income is taxed at 37%.

The number of taxpayers subject to the alternative minimum tax is limited: the AMT is a tax that was originally designed to ensure that the rich paid at least some tax by removing some tax credits and deductions. Under the current tax system, a taxpayer must calculate both the regular tax and the AMT, and then pay the higher tax. Now, individuals who have an income less than or equal to $70,300 and married couples filing jointly with an income less than or equal to $109,400 qualify for exemption from the AMT.

A tax credit is created for nonchild dependents (children above 17, elderly parents, etc.).

Estates less than or equal to $10 million are exempted from the estate tax, a tax on the inheritance of the estate of a deceased person.

State and local tax (SALT) deductions are limited to $10,000, but property tax deductions are kept: As the name implies, SALT deductions are taken from the taxpayer’s state and local taxes and added back to the taxpayer’s income. SALT deductions are itemized deductions. A taxpayer can choose to take itemized deductions or just the standard deduction, so taxpayers who choose to take the standard deduction will not be affected by the limitation of SALT deductions (all deductions except the standard deduction and the personal exemption are itemized deductions). [6]

Going forward, mortgage interest deductions are limited. Under the GOP tax plan, taxpayers can deduct money only from $750,000 of interest paid on mortgage debt, instead of $1,000,000. This provision is set to expire at the end of 2025.

Taxpayers can deduct more of their medical expenses. This will revert back in 2025.

Deductions on moving expenses are eliminated, except for members of the military.

The mandate to buy health insurance, implemented by the Affordable Care Act, is removed.

Business income tax changes [7]

The corporate tax rate is reduced from 35% to 21%.

The alternative minimum tax for corporations is repealed.

American companies pay U.S. taxes only on profits they earn within the U.S. Offshore profits will instead be taxed according to the tax laws of the country where the profits are made. In order to prevent corporations from gaming the system, some anti-abuse provisions are put into place, such as a small tax on offshore income exceeding a certain amount. Existing foreign profits are taxed once. Existing cash assets are taxed at 15.5% and non-cash assets are taxed at 8%.

S. companies are taxed by 20% on payments they make to their foreign subsidiaries.

Pass-through taxes are deducted by 20%: the income of LLCs, S-corporations, proprietorships, and partnerships is directly added and taxed with the personal incomes of the owners, partners, and shareholders. This tax is called the pass-through tax. To prevent taxpayers from specifying part of their personal income as pass-through business profits, limits on how much income would qualify for the deduction are put in place.



Effects

Note: the terms “winners” and “losers” refers to a group of taxpayers’ situations under the new GOP tax bill compared to their situation in the current tax system. Winners pay less taxes, while losers pay more.

Winners

Parents: The child tax credit is doubled, benefiting parents of children under 17.

The rich (income over $300,000 for singles): Under the GOP tax plan, the top tax rate is decreased from 39.6% to 37%.

People with medical expenses: under the GOP tax plan, in 2018 and 2019, people with medical expenses can deduct more of the expenses.

People without health insurance: the mandate to buy health insurance is removed, so people without health insurance do not have to pay the penalty.

Small-business owners: pass-through taxes are deducted, benefiting small-business owners, partners, and shareholders.

Corporations: corporations will benefit from the decrease in the corporate tax rate.

Multinationals: multinational corporations will no longer have to pay U.S. taxes on offshore profits.

Losers

Citizens of high-tax states who itemize deductions: SALT deductions are limited to $10,000, so citizens of high-tax states, such as California and New York, would face a lower itemized deduction. Because of the limitation of SALT deductions, several Republican representatives of highly taxed districts voted against the tax bill.

Homeowners who itemize deductions: the mortgage interest deduction is limited to $750,000 instead of $1,000,000 currently, so homeowners who itemize their deductions would be at a disadvantage.

Large families: the removal of the personal exemption would hit large families the hardest, because the personal exemption can no longer be claimed. The removal of the personal exemption cannot be balanced by the increase in the standard deduction, if there are many children.

Overall

The tax brackets in the new GOP tax plan would lower tax rates for most people in the U.S. The increase in the standard deduction and the limitation of some itemized deductions will cause many Americans to switch to taking the standard deduction.

The Republicans claim that the tax plan will benefit the “typical” American family (middle class family of four, two parents, two children). Consider a “typical” family, taking the standard deduction, making $75,000 a year. Under the current tax system, the total deductions would be the standard deduction ($13,000) plus the personal exemption ($4,150) for each person. Thus, the total deduction for the family of four would be $29,600, and the taxable income would be $45,400. After applying the tax rates and subtracting the child tax credit ($1000 for each child), the total tax paid under the current tax system would be $3877.50. Under the GOP tax plan, the family would take the standard deduction ($24,000), making the taxable income $51,000. After applying the tax rates of the GOP tax plan and subtracting the child tax credit ($2000 for each child), the total tax paid under the GOP tax plan would be $1739.50. Thus, the Republicans’ claim that the tax plan will benefit the typical American family is correct. However, if the family is itemizing their taxes, the family might be worse off, because of the limitation of SALT deductions and the limitation of the mortgage interest deduction.

However, the wealthiest Americans get a disproportionate share of tax cuts, compared to the middle and working class. According to Politifact, in 2019, 23% of the GOP plan’s tax cuts will go to people with an income of $500,000 and over, but only 0.9% of Americans have an income of $500,000 and over. Furthermore, in 2027, people with income over $500,000 would get 48% of the GOP tax plan’s tax cuts. [8] While most Americans see a tax decrease under the GOP tax plan, the richest Americans benefit more, compared to the middle and working class.

There’s a catch to the tax plan, though. In order to limit the bill’s cost, most of the individual income tax changes are set to expire at the end of 2025, including the change in the tax brackets and the increase in the standard deduction. [9] This is why people with income under $75,000 would get 0% of the tax cuts in 2027, according to Politifact’s table. [8] Most Americans will see a substantial tax hike in 2026 unless Congress votes to extend the bill’s changes.

Sources:

[1] http://www.cnn.com/2017/09/27/politics/donald-trump-tax-reform-indianapolis/index.html

[2] http://news.gallup.com/poll/223238/independents-democrats-not-board-gop-tax-plan.aspx

[3] http://www.businessinsider.com/trump-tax-reform-bill-polls-gallup-quinnipiac-text-gop-2017

[4] http://docs.house.gov/billsthisweek/20171218/CRPT-115HRPT-466.pdf

[5] https://www.npr.org/2017/12/15/571258698/chart-how-the-new-version-of-the-republican-tax-bill-would-affect-you

[6] http://www.taxpolicycenter.org/briefing-book/how-does-deduction-state-and-local-taxes-work

[7] http://money.cnn.com/2017/12/15/news/economy/gop-tax-plan-details/index.html

[8] http://www.politifact.com/truth-o-meter/article/2017/dec/19/who-wins-and-who-loses-tax-bill/

[9] https://taxfoundation.org/final-tax-cuts-and-jobs-act-details-analysis/