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What the House Tax Reform Bill Means for You

November 18, 2017

The U.S. House tax reform bill has passed and is making headlines. Here are a few significant changes to know about the bill as outlined in the November 11th, 2017 issue of The Economist as well as a November 16th article of the Washington Post:

 

  • Reduces the rate of corporate taxation from 35% to 20%. This is a permanent change that will not expire.

  • Allows capital investment to be deducted immediately, rather than over time. This proposal is scheduled to expire after five years.

  • Change to taxing firms on income where it is earned, while taxing the cash of $1.3 trillion parked overseas by American multinationals at 12%.

  • An excise tax on 20% of all payments made by firms in the U.S. to foreign affiliates, which would disrupt global supply chains.

  • Caps the deductibility of interest paid on mortgages from $1 million worth of home loans to $500,000.

  • Removes the estate tax which only applies to estates worth more than $5.5 million and removes the carried-interest deduction used by hedge funds and private equity firms. The wealthy no longer would have to pay the alternative minimum tax (AMT), a safeguard against excessive tax dodging that's been in place since 1969.

  • Collapses the seven tax brackets down to four - 12 percent, 25, 35, and 39.6. The top rate applies to income of $1 million or more a year for couples ($500,000 for individuals).

  • Scraps the personal exemption, which reduces a household’s taxable income according to its size, in favor of doubling the standard deduction. There is a flat $300 tax credit for adults and a big boost to the child tax credit. However, the adult credit will phase out and the child credit is not fully indexed to inflation. Eventually, the bill would raise taxes for many low and middle income households.

  • No student loan deductions - low and middle class Americans can deduct up to $2,500 a year in student loan interest. This will go away in 2018.

  • The vast majority of Americans (92 percent) will see little to no change in their taxation. But after five years, 22% of Americans will actually pay more.

  • People facing tax hikes are middle class ($40,000 to $75,000) or in the “upper upper” middle class ($200,000 - $400,000). The Family Flexibility Credit expires in 2022. The bill also uses a low measure of inflation after 2022, which means more people jump from the 12 percent tax bracket to the 25 percent.

 

There is a widespread belief that the bill is helpful to the rich and harmful to the middle class. According to the NBC-Wall Street Journal poll published Nov. 1, only 25% of respondents called Trump's tax plan a "good idea" The Tax Policy Center found that half the benefits of the bill go to the top 1 percent by 2027.

 

In addition, the bill will add an estimated $1.4 trillion to the deficit. The Economist magazine argues that the bill should be revenue neutral. They believe that fiscal (tax) stimulus to the economy is unnecessary when the unemployment rate is at it current low rate. Also, a growing deficit will make it harder to boost spending or cut taxes in the next recession.

 

Another change The Economist suggests is to make the bill more growth-friendly. It should decrease the federal deficit as well as place a greater emphasis on investment “expensing.” Firms would be able to knock the cost of investments off their taxable profits in the year they are made, rather than as their assets depreciate. This would reform business taxes in a way to encourage investment. Unlike cuts to the corporate-tax rate, expensing does not provide windfall gains to the owners of existing capital, or to firms with market power.

 

True tax reform rather than just tax cuts can foster an economy more conducive to creating wealth. Congress is “fast tracking” this legislation with a goal of making it law before the end of 2017- to be effective as early as the calendar year 2018.  Visiting with your financial advisor to discuss its effect on your future financial planning and investment management strategies could be a smart move. Please contact TABER Asset Management,  Des Moines based investment management and financial planning firm, at 515-557-1860 or invest@taberasset.com to arrange a consultation concerning your financial future.

 

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