How the GOP’s race to pass tax reform affects you
Republicans can almost taste victory this week as they prepare to merge tax reform bills from the House and Senate into one piece of legislation, approve it, and speed it to the White House for President Trump’s signature. The president has made clear he wants to close this out before Christmas. This may be great politics (“GOP gets win on taxes!”) but what about the future of middle-class families?
That’s tax reform in 2017: rushed, behind closed doors, and with unclear implications. Just this week, Sen. Marco Rubio (Fla.) threatened a crucial “no” vote on the entire plan and set off a scramble by lawmakers to placate him when he asked for an expanded child credit for low-income families. Members of the House-Senate negotiating committee responded by making $1,400 of the $2,000 credit refundable (meaning that even low-income Americans who owed no tax could get the money), up from $1,100 in the Senate version—putting Rubio back in the “yes” column.
As Congress prepares to vote on the reconciled GOP tax bill next week, it’s still very much a moving target, especially when it comes to details like how much, or even whether, ordinary Americans will get a break. Also up in the air: how much the legislation would balloon the deficit. That said, we know the general priorities and can do basic math to see some key ways in which the plan will affect various families, like yours. What if I’m a freelancer? What if I live in blue state? What if I’ve got kids?
Here are some groups and how they’d be affected:
The near-doubling of the standard deduction (it’s set to increase from $6,350 to $12,000 for individuals and from $12,700 to $24,000 for married couples) may not be great news for the self-employed.
Currently, about 70% of Americans claim the standard deduction rather than itemize their expenses—like supplies, travel expenses, office space, and health insurance—to further lower their taxes. But many such deductions are being eliminated under the new law, and, moreover, the increased standard deduction would mean as many as 94% of Americans will not even bother to itemize.
The uncertainty for freelancers doesn’t end there. To qualify for a “pass-though” tax rate of 21%, which would match the newly reduced corporate tax rate that is far below the new individual rates, some freelancers will be tempted to incorporate themselves as small businesses. That’s an expensive and complicated process, and it’s not even clear whether it would pay off with a lower tax bill. As PBS NewsHour noted, the big winner here may be accountants.
Democratic-leaning states like New York and California tend to have higher state and property taxes. As the New York Times showed, the proposed limitation of the state and local tax deduction (including property taxes) to $10,000 will hurt blue-state residents in particular—especially families in states like New Jersey who may already be struggling with property taxes. A number of red states, including Texas and Tennessee, don’t even have state income tax.
A family with two kids in the middle of the country (Iowa, let’s say) making the average household income of about $60,000 would pay less tax in 2018, with after-tax income rising by 4.9%. But by 2027, after some proposed changes like lower income tax brackets phase out, the same family’s after-tax income would actually decrease by 1%.
Another factor: Because of the elimination of the personal exemption, worth $4,050 per person in 2017, “families with many children would pay higher taxes despite the increased standard deductions. For example, a married couple with two children making $56,000 a year would pay $68 more a year,” reports The Balance.
Want a closer look at how your family in particular would be affected? CNN has produced a great, intuitive tool that shows the fast-moving legislation’s individual impact (with updates planned to reflect the final law).