Yes, Congress passed a new Tax Bill in 2018. Almost all people call it “2018 tax reform“, so do we, no matter that it is not a reform at all. It didn’t impact your 2017 Tax returns, but they will mean something for you in the years to come. That is why you need to know the most important changes and how they will affect you and your taxes.
While big corporations have already got some huge tax cuts, for the average Joe, the income tax credits, deductions, and other changes won’t be applicable until next tax season (January-April 2019).
Furthermore, the United States tax code is so dense and opaque that it’s understandable that many Americans are confused by this tax act and may be unaware of the repercussions. In order to address some of the concerns many of you may have about the new bill, here are some myths about it along with some of the positives and negatives you should expect to experience from this legislative decision.
First, the Myths About 2018 Tax Reform
It will deliver a tax cut for the majority of Americans – while corporations get millions, middle-income households (earning $49,000-$86,000) will see an average tax cut of $930, and families earning between $86,000 to $149,000 will get an average tax cut of $1,800. And all this is only temporary. A decade from now, about 2/3 of middle-class taxpayers will see a tax hike, albeit a relatively small one at around $150.
And what about folks earning less than $25,000 a year? They will keep an extra $60 dollars a year in their pockets, i.e, about $5 more dollars a month. In contrast, top earners will get on average a $51,000 tax cuts.
It simplifies everything – instead, the 2018 Tax Reform is more complicated, creates more loopholes for special interests and is more unfair to the middle class that former tax rules. To offset the lost revenue the bill eliminates the “personal exemption”, doubling at the same time the child tax credit. Furthermore, some families will also be affected by new limits on the mortgage interest deduction, which could limit deductions for home buyers in high-cost areas, in addition to cramping homeowner’s property values, so now more than ever you need a tax professional to get the most of your tax returns or to pay the less.
The economy will be boosted leading to higher incomes and better job opportunities for American workers – The more debt the bill ultimately creates, the less it is likely to add to the economy. That’s because government borrowing competes for investment dollars with private industry. If the government ends up having to borrow too much, interest rates will rise and choke off private companies’ ability to raise money to invest in new equipment or to add jobs.
Individuals and 2018 Tax Reform
Individuals still have seven tax brackets in the new law, but each one is lower than before. So, the effective tax rate for individuals will go down, even if changes in other deductions impact taxable income.
How well the standard deduction and child tax credit increases counterbalance the loss of the personal exemption depends on family size, whether you itemize deductions, and whether you file as a single, married couple, or head of household.
Unlike corporations, the alternative minimum tax for individuals was not repealed. The original purpose for this tax scourge has been gone for at least 30 years.
Now, due to the new, slower inflation measure used to annually reset tax-bracket thresholds in the 2018 Tax Reform, the standard deduction, exemptions, and others, individuals will move into higher tax bracket more quickly, and the value of tax benefits will be gradually eroded.
Business Owners and 2018 Tax Reform
According to Inc.com, “one of the most immediate benefits business owners will notice with the new tax code is a decrease in the corporate tax rate from 35 percent to 21 percent, which came into effect on January 1, 2018. As any business owner knows, the costs of starting a new business can be astronomical, so it should come as a great relief that this burden will be somewhat mitigated in the next fiscal year”.
Small businesses, like Sub S Corps, LLCs, sole proprietors, and partnerships – millions of small firms – will get a 20% deduction on “qualified” business income. The deduction will be applied before the income lands on the owner’s individual return and taxed at the individual rate.
Even though Section 179 direct expensing was doubled (see The Good, 8), most small businesses don’t put hundreds of thousands into capital acquisitions in a year. So, in this case, the 2018 Tax Reform is useless.
In the midterm, the increase in the government deficit due to the huge tax cuts to big corporations will have serious tangible consequences for the future of small and middle-size businesses, such like banks becoming more reticent to provide loans to burgeoning enterprises due to lack of confidence in our currency or our country.