How the GOP tax reform bills will affect your finances

How the GOP tax reform bills will affect your bottom line

“You’re going to like it a whole lot more,” said Mr. Trump of the Senate version.


The Washington Post, “Trump Says Democrats Will Like Senate Tax Plan More Than House Version,” 11/8/17

At least they aren’t  messing with your 401(k).

As far as impact on your wallet, that’s the best that can be said for either of the two tax reform bills making their way through Congress this month. Now that Senate Republicans have put their own tax reform proposal on the table, joining a House bill introduced on November 2, let’s take a closer look at some of the claims that have been made about the proposals—and what the bills would actually do to your bottom line.

One caveat: The Senate bill is still in the committee stage, and the House bill faces a full-chamber vote next week. So the final legislation, if we reach that stage (and as we saw with healthcare, that is not a guarantee), is subject to amendments, debate, and lobbying.

Claim #1

“‘The entire purpose of this is to lower middle-class taxes,’” [Speaker of the U.S. House of Representatives Paul] Ryan said in an interview on CBS’ Face the Nation. “‘So yes, people are going to get tax cuts.’”

While taxes would go down on average for all Americans (temporarily, in many cases), the biggest cuts would go to higher-income households.

Median U.S. household income is currently about $60,000. And independent analysis of the House bill (the only version that has been fully scored) shows that the legislation would not provide lasting middle-class tax relief. According to the Tax Policy Center, “taxpayers in the middle income quintile (those making between about $48,000 and $86,000) would receive an average tax cut of $700 or 1.2% of after-tax income. Taxpayers in the top 1% (those making more than $730,000) would receive 22% of the total tax cut: an average cut of $37,000 or 2.5% of after-tax income.”

Even Congress’s own nonpartisan Joint Committee on Taxation agrees, reporting that while 61% of taxpayers would see their taxes fall through 2019, nearly 20% would be paying higher taxes by 2027. That same year, the richest 1% of Americans would be enjoying almost fully half of the gains from the tax cut.

As usual, the devil is in the details. Both bills repeal the personal exemption families use (worth $4,150 each in 2018) and offset that loss by expanding the child tax credit. But the credit is not tied to inflation (like the personal exemption is), and under the House bill, the new credit expansion expires after a few years. That’s why the middle class will eventually get hit.

When you hear White House economic advisor Gary Cohn say, “We’re trying to solve for middle income, hardworking families,” remember these facts.

Claim #2

“Streamlines higher education benefits to help families save for and better afford college tuition and other education expenses.”

First up, the student-loan interest deduction. Under current law, this is capped at $2,500 in interest per year, so if you’re in the 25% tax bracket and deduct $2,500 from your taxable income, that’s $625 less in taxes each year. For the average college senior who now graduates with $37,000 in debt, every little bit helps. The House bill erases that tax break, while the Senate bill would retain it.

What’s more, in the House bill, all education tax credits would be consolidated into one single credit: the American Opportunity Tax Credit. Currently, the AOTC allows you to get up to $2,500 back if you spend $4,000 on tuition and fees, and its use is capped at four years. (House Republicans would add a new fifth year, during which you could get up to $1,250 back.) Note that House Republicans would exclude undocumented students from the credit by requiring a Social Security number to access it.

Meanwhile, say goodbye to the more flexible Lifetime Learning Credit, which currently allows you to deduct 20% of the first $10,000 of qualified expenses each year you’re in school and has no limit to how many times it can be used, making it especially important for grad students and part-time students, including workers looking to improve job-related skills. Both the Senate and the House proposals would squeeze these groups.

Finally, the House bill makes taxable any education benefits employers provide for their workers and, in a devastating move for many grad students, the tuition waivers many schools use to compensate their graduate teaching assistants.

The Senate proposal vaguely promises “education relief” for graduate students, but offers no specifics.

Claim #3

“Other good signs for the middle class include the doubling of the standard deduction.”

—Jake Novak,

Both bills (nearly) double the standard deduction, the threshold beyond which taxpayer must itemize deductions to lower their tax bill. The new figures: $12,000 for individuals (up from $6,500 in 2018) and $24,000 for married couples (up from $13,000).

For many Americans it will not be enough when you consider the cuts above, plus all the other elements of tax relief the House bill would repeal. To see what I mean, here’s a list of some of the other popular breaks that are on the chopping block:

Assistance for the sick. The House bill eliminates the medical expense deduction—a valuable break for sick people whose treatment costs exceed 10% of their income. This impacts a cross section of people: working-age people with serious illness and families with ailing parents or a special-needs child. The Senate bill would retain this deduction.

Break in job relocation expenses. The House bill would undo the deduction for expenses when you must move for work—common for military families.

Tax-free money for child care. The House bill initially did away with dependent care flexible spending accounts that currently exclude up to $5,000 per year from a parent’s taxable income for child care (or elderly care) costs. An amendment preserves them until 2022.

Ability to write off state and local taxes. The Senate would repeal completely this deduction for state and local taxes (key for residents of high-tax states like New York and California) while the House would repeal all but a $10,000 deduction for property taxes.

Help with your home loan costs. Under the House bill (but not the Senate bill), the mortgage interest deduction for future home loans which would apply only to loans up to $500,000, down from $1 million—a blow to people in cities with soaring home prices.

So what can you do? The bills are still making their way through the legislative process, so call your representatives in the Senate and the House and speak your mind.

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