Proposed Tax Law Changes:
Here we are again hoping for congress to get their act together and pass something beneficial for the taxpayers. Health care reform has been anything but “repeal and replace”. I feel sorry for people who don’t have employer paid health insurance and the employer is against the wall themselves. It’s starting to feel like our elected officials are just doing “dog paddeling”, afraid to do anything bold that would be meaningful to the taxpayers. And then there’s the proposed tax reduction being touted by this same group….the only trouble is, there isn’t much in it for the middle class.
In order to know how these changes will effect you, you have to know how the law is presently written. Under current law, there is a standard deduction based upon filing status and personal and dependent exemptions. These two categories added together, reduce your income to be taxed down to “taxable income”. So, if you are married with 3 children, unless you itemize your deductions, you would subtract the standard deduction of $12,600 and the exemptions (2 personal plus 3 dependent=5 total) by $4050 or $20250, your deductions would be $32,850. This figure reduces your income down to taxable income. So, if your wages and other income sources totaled $62,580, you would reduce that by the $32,850 making your taxable income $30,000. Right now, that $30,000 would be taxed at 10% on the first $18650 and then 15% on the balance or $3567.
Now let’s look at what they are proposing. Elimination of the personal exemption of $4050 in exchange for a doubling of the standard deduction. So, the write off under this proposal for our couple with income of $62850 would move to $24000 and their taxable income would then be $38,850. You would then pay taxes of 12% on the entire amount or $4662 in federal taxes. This represents an INCREASE IN TAXES OF $1095. When dependent children are under age 17, the child tax credit further reduces the tax burden. Under the old law, this couple would receive a $3000 child tax credit meaning that their total tax bill would only be $567! The new law states that the child tax credit will be increased but no one has said how much. Let’s assume it moves to $1200 per child. In this case, the taxpayers would reduce their taxes by $3600 leaving them a net amount due to the IRS of $1062. Unless they increase the child tax credit to $1500, THERE IS NO TAX REDUCTION.
The simplification of moving to 3 tax brackets isn’t simplification at all. It’s just a shell game to mislead you. Worse yet, if you are someone with large medical, property taxes, state income taxes, employee business expenses, brokerage fees or suffered a casualty loss, all those write offs are GONE. They say it’s because the rich people take advantage of such items but the benefit for itemizing starts to phase out as your income moves closer to $260,000 MFJ. Quite frankly, the middle class gets the shaft.
Oh, but if you have a successful small business, your tax rate drops to 25% down from 39%. That is a meaningful 14% drop. Let’s assume your company has a net profit of $1,000,000. Then, your taxes drop by $140,000. Now that’s a tax break! Certainly, we want businesses to stay in the U.S. Certainly, we want to encourage growth in all businesses. Certainly, we want offshore income to come back to the U.S. But, if you are touting a tax cut for the middle class, then it OUGHT to be a tax cut not a flim flam slight of hand.