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PILLA TALKS TAXES - Featured Article
_________________________________________ 

MORE ANALYSIS OF THE TAX CUTS AND JOBS ACT

Impact of the Law in 8 Family Scenarios 

 

A number of public policy research institutes have opined on how the Tax Cuts and Jobs Act will impact Americans. One side continues to insist that the law is nothing more than “tax cuts for the rich.” This is non-sense considering that the law creates cuts that cover just about the entire gamut of income brackets.  

The law rewrites dozens of code sections, eliminates certain deductions, and changes the rates. There is a new deduction for small business owners and the corporate tax rate was slashed from 35% to 21%. According to the Tax Policy Center, the majority of Americans will get a tax cut in 2018 and beyond. See: http://www.taxpolicycenter.org/publications/distributional-analysis-conference-agreement-tax-cuts-and-jobs-act.

In fact, at least four out of five taxpayers will see their taxes cut under the Jobs Act. As I have reported in the past based on analysis by the Tax Foundation, the average taxpayer will likely see their after-tax income rise by about 2.2%. Already the IRS adjusted the W-4 withholding charts for employers to account for the law changes. Because of that, people are now getting more in their paychecks every month due to the reduced tax burden. 

According to the Tax Policy Center’s numbers, citizens earning between $48,600 to $86,100 annually will see their net income grow by about 1.6%. Those earning from $307,900 to $732,800 will see an increase of about 4.1%. Does that constitute “tax cuts for the rich?” The fact is higher income taxpayers pay the overwhelming bulk of taxes to begin with. They are naturally going to see a greater percentage reduction in their liabilities when there’s a cut.  

Exactly how all the changes will affect you depends on where you live, your family size and what you do for a living. According to analyses done by BNA, those in high tax states with substantial itemized deductions may see a tax increase because of the reduction or elimination of certain deductions. But if you earn income from self-employment, you can expect a substantial cut because of the 20% deduction that applies to self-employed people.

 

And yes, we are still working on an article to fully explain how the 20% deduction works. I know. I promised. It’s not as easy as it looks (or sounds).  Anyway, I’m making progress—really.

BNA produced eight different scenarios to illustrate how the Jobs Act might affect certain people. The scenarios examine 2018 wage and self-employment business income. The examples do not address less common scenarios or the extent to which corporate shareholders will be affected because of the reduced taxes on corporate earnings.   

 

Eight Hypothetical Scenarios*  

 

1. Multimillionaires in New York 

 Manhattan residents, a married couple, have adjusted gross income of $2 million. They have a jumbo mortgage (at 4% interest) and take a $40,000 deduction on mortgage interest. They pay property taxes of $96,250 and state income taxes of $135,360. They make annual charitable contributions totaling $100,000. 

They will pay a bit more because they lose itemized deductions, most notably due to the cap of $10,000 in state and local taxes, plus the reduction of available interest for loans capped at $750,000. (The cap under prior law was $1 million.) Some of the loss is offset by the drop in the top marginal tax rate from 39.6% to 37%.   

The effective tax rate for these people goes up slightly, from about 30.51% to 31.19%.

  

2. A Second Home in California  

A married couple has AGI of $1 million. They have a primary residence in Malibu and a second home in Lake Tahoe. The property taxes on the Malibu home are $15,860, and $4,896 on the Lake Tahoe home. They deduct a total of $40,000 in mortgage interest for the two homes and they give $50,000 to charity.  

While they lose almost $86,000 in deductions, the drop in the top tax rate means their effective tax rate goes up from 26.77% to 27.24%, only a slight increase. 

 

3. The Small Business Owners in Pittsburgh  

This married couple has a small manufacturing business in Pittsburgh. Their AGI is $300,000, all from their business. They have two children under age 17. Their deductible mortgage interest is $6,000; their property taxes are $8,600; and they give 5% of their income to charity.  

They will get a big benefit from the 20% deduction for business owners who pay business income taxes on their individual tax returns. That deduction will be worth $60,000. It will cut their AGI considerably, reducing their effective tax rate from 18.69% to 11.58%.  

 

4. The Family in Suburban New York  

A married couple in a New York suburb has two children under age 17. They earn $275,000 and pay state income taxes of $17,290. Their mortgage interest deduction is $14,000, and they pay property taxes of $13,750. They give about the same amount to charity.  

While they will lose some of their deductions and exemptions, they will benefit from the increased child tax credits. Moreover, because the law increased the income point at which the alternative minimum tax kicks in, they will avoid AMT of $5,000. Their effective tax rate goes from 17.45% to 15%. 

 

5. Single in Manhattan  

This single New York resident has no children and rents an apartment. He pays state income taxes of $8,148 and gives about $6,500 to charity.  

This citizen comes out ahead because the deduction for state and local income taxes, up to $10,000, means he doesn’t lose any of it. Plus, he gets his deduction for charitable contributions. His effective tax rate drops from 18.57% to 16.90%.  

 

6. Married in Austin  

This couple rents their home and has no children. Their AGI is $100,000. They give $5,000 a year to charity.   

The law eliminates the personal exemptions, which are $4,050 for each of the two taxpayers. However, that loss is offset by rate cuts and a near-doubling of the standard deduction, from $12,700 to $24,000 for married couples. Their effective tax rate goes from 11.28% to 8.74%.  

 

7. Median Income in Oregon  

This Portland couple has $58,000 of AGI, which is about the median household income for the U.S. They own their home, pay property taxes of $1,688 and mortgage interest of $3,000. Their state income taxes are about $4,744.  

Like the couple in Austin, they lose their itemized deductions but benefit from both the higher standard deduction and the reduced tax brackets. They will see a reduction in their effective tax rate, going from 8.01% to 6.38%. 

 

8. Renting in Milwaukee  

This married couple has $40,000 of AGI with one child under age 17. They rent and have state income taxes of $2,104.  

This family ends up with a negative income tax rate. They benefit from the doubling of the standard deduction and enhanced child tax credits, which are refundable. That means that, subject to limits, low-income taxpayers are able to get more back in refunds than they paid in the first place. Their effective tax rate goes from 1.29% to -1.00%, thus leading to the refund.  

 

  * The above hypothetical scenarios were provided by BNA is its Tax Management Weekly Tax Report, December 25, 2017.  

 

All That is Wrong with the Tax Code   

These scenarios clearly point out all that is wrong with the tax code. The rate of tax that a person or family ultimately pays is not solely dependent on their income. Rather, a vast array of social issues come into play, including whether a person is married or not, whether they have children, the age of the children, whether they own a home, and where in the U.S. they live, if they make charitable contributions or not—just name a few.   

These are all factors that work to make the outcome of the tax laws, and the bottom line tax burden for a given taxpayer, a matter that is completely arbitrary. These various factors are not driven by economic considerations and they certainly are not based on Constitutional provisions or theories. Instead, they are driven by the always-moving target of the nebulous concept of “social justice.” And that itself flows from the unsound notion that it’s the government’s responsibility to achieve income equality in the U.S.   

Apart from the fact that just about all of the Jobs Act tax cuts expire after 2025, this is another reason the Jobs Act is not “tax reform.” The law hasn’t reformed anything in the truest sense of the word. It just stirred the pot on what is deductible, and in what amounts, based on arbitrary ceilings (or floors), and for how long.   

Until individual members of Congress wrap their heads around the idea that the legitimate taxing power of the U.S. Government does not involve the use of force to achieve equality of outcome on the income racetrack, we will never have true tax reform. In a free society, there will always be those who achieve at a higher level than others for a host of reasons the government cannot scrub out of existence.   

Thus, so-called equality is achieved only through overwhelming force, and even at that, such equality is measured by the lowest common denominator, not the highest. Such is the model of socialist and totalitarian governments around the world. It has no place in a constitutional republic. 

 
This is  an article taken from March 2018  issue of "Pilla Talks Taxes."'
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ARTICLES FOUND IN THE LATEST 

PILLA TALKS TAXES ISSUE:

 

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