December 22, 2017

MY CORNER by Boyd Cathey

Will the 2017 Tax Reform be Congress's Christmas Gift to American Citizens?

Friends,

As we continue to approach the Holy Day of Christmas and the vivid recalling of the Nativity of Our Lord, it is salutary to let the joy that comes from that Singular Event within human history—and the knowledge and assurance of its Promise—fill our lives. Indeed, this is the season when thoughts of most everyone, even the thoughts of those not normally inclined to think of the Christ-child and the significance of Christmas—turn toward that cradle in Bethlehem and what happened there over 2,000 years ago.

It is the season of giving and sharing, the season of, at least for a little while, lifting our minds out of the daily rhythm of life with all its concerns, preoccupations, worries and distractions. We see the bright Christmas decorations, the brilliant lights hung, the beloved Manger Scenes, and the gaudy store displays. We look for the “good” in others. And more perhaps than any other time of the year, there are smiles on our faces…more anticipation. Down deep the non-practicing Christian, the agnostic, and even the atheist, know that this day is unique and special. Even the old Soviets could not abolish Christmas or efface its significance….and they finally ceased even trying.

Today, three days before the Holy Day, let’s take a brief look at what the Congress just enacted: the new tax reform legislation, and what it means and how it might affect us. In a sense, this is the “gift” that our legislators have given us right before Christmas, and, at least on a very secular level, it will affect nearly all of us for the foreseeable future.

Although I am no expert in taxes or financial matters, in general, from what I can read and interpret, the pluses in this legislation outweigh by far the minuses. It is certainly the first major overhaul of our tax system since the Reagan presidency, and it appears that both smaller businesses and corporations as well as a majority of individual (and joint) filers will profit in reduced taxation.

For the following information that I relay to you, I use generally Fortune [http://fortune.com/2017/12/20/gop-tax-bill-cuts-start/ ] and The Wall Street Journal [https://www.wsj.com/livecoverage/tax-bill-2017 ] analyses, summing up in layman’s language as best I can. (Any mistakes or errors below are probably mine!)

First, for INDIVIDUAL FILERS:

1)  Individual rates will be lowered: The bill keeps seven tax brackets, but changes the rates from 10%, 15%, 25%, 28%, 33%, 35% and 39.6%, to: 10%, 12%, 22%, 24%, 32%, 35% and 37%. And here is how that would apply to income:

***10% (income up to $9,525 for individuals; up to $19,050 for married couples filing jointly)
***12% (over $9,525 to $38,700; over $19,050 to $77,400 for couples)
***22% (over $38,700 to $82,500; over $77,400 to $165,000 for couples)
***24% (over $82,500 to $157,500; over $165,000 to $315,000 for couples)
***32% (over $157,500 to $200,000; over $315,000 to $400,000 for couples)
***35% (over $200,000 to $500,000; over $400,000 to $600,000 for couples)
***37% (over $500,000; over $600,000 for couples)

2) The legislation nearly doubles the Standard Deduction, while eliminating Personal Exemptions: For single filers, the bill increases the Standard Deduction to $12,000 from $6,350 currently; for married couples filing jointly it increases to $24,000 from $12,700. And as a result, the number of filers who itemize will most likely decrease sharply, since the only reason to do so is if deductions claimed exceed the standard deduction.

3)  The local and state tax deduction is capped at $10,000 (currently it is unlimited for those taxes and for property taxes). This, of course, has been the major complaint of those “big tax” states like New York and California which have been able offset their huge tax burdens by enabling those richer subjects to deduct those taxes on their federal forms (and guess who ends up footing their bill?).

4)  The Child Tax Credit has been expanded. The credit would be doubled to $2,000 for children under 17. Like the first $1,000 of the child tax credit allowance, $400 of the additional $1,000 also will be refundable, meaning a low- or middle-income family will be able get the money refunded to them if their federal income tax liability nets out at zero. And the bill would allow parents to take a credit of $500 for non-child dependents they are supporting, including a child 17 or older, an ailing elderly parent or an adult child with a disability. (This is a major boon for families.)

5) There is a cap on mortgage interest. Those who take out a new mortgage or a mortgage on a second home will now only be permitted to deduct interest from debt up to $750,000, down from $1 million as tax law now reads. (I suspect that most of us will not be affected by this provision!)

6) The new Alternative Minimum Tax provision will reduce the number of filers who would be affected—the income exemption level is raised to $70,300 for individuals (up from $54,300 now), and to $109,400 for couples ($84,500 now).

7) Medical expense, student loan interest, and classroom supplies bought by a teacher herself are continued as deductible, and medical expense deductions will actually increase over the next two years.

8) The Estate Tax is practically done away with. It still exists, but the new exemption DOUBLES the current levels which now stand at $5.49 million for individuals, and $10.98 for married couples. (Again, I suspect that this will not be a concern for most of us!)

9) The mandate to purchase health insurance is eliminated (the infamous “mandate” in Obamacare). There is no longer a penalty for not buying it. Additionally, this will greatly assist the Federal government as it is now required to spend millions of dollars subsidizing those mandated purchases…and it will also, in turn, help pay for this legislation.

Second, for BUSINESSES AND CORPORATIONS:

1)  The legislation lowers the tax burden on small business owners, partners and shareholders, LLCs, and partnerships with a 20% deduction.

2)  The corporate tax rate is reduced from 35% to 21%, and the Alternative Minimum Tax on corporations is repealed.

3) The new tax reform bill will change how multinational corporations are taxed. Presently multinational corporations may defer payment of taxes on foreign profits until they bring those profits home when they must pay them. However, most foreign competitors to our native companies here in the United States come from countries with territorial tax systems, meaning they don't owe tax to their own governments on income they make offshore (such as here in the USA). The old tax system puts American businesses at a disadvantage. The new tax bill changes this:  it converts America into a territorial system like other nations. It also includes a number of anti-abuse provisions to prevent corporations with foreign profits from cheating the system.

The tax reform of 2017 is, of course, predicated heavily on the prospect that with steep decreases in the business tax rate, domestic companies will expand, hire more, pay more, and that new ones will spring up. And the expectation that the lower rates will encourage corporations that may have left the country to return and invest here—and hopefully foreign companies will also see advantages in locating here.

More jobs and more salaries should, then, be the result, just as during the last major period of economic expansion, during the Reagan years.

But for individuals and couples there should be some relief as well. Estimates from several sources, including the two cited previously, indicate that as many as 80 % of American citizens will see their taxes go down. Again, it may depend on the state.  “Blue” states like California and New York which have taken advantage of the IRS code to tax their own citizens at high rates, knowing that it would be Washington (via state and local tax deductions) that would make such high rates palatable, now will be perhaps compelled to re-examine their own rates—and their excessive expenditures (perhaps not so much largesse to the millions of illegals who flock to those states?).

Columnist Pat Buchanan has an excellent item today on the 2017 tax reform legislation and what it means for both business and the average American citizen. Pat also discusses the political implications for 2018 and even potentially for 2020. As he summarizes it, the passage of the tax reform act is a major milestone…and now it remains to be seen, despite all the Democrat and leftists Cassandra-like warnings, if it will have the desired effects. [http://buchanan.org/blog/republicans-bet-farm-128341 ]

Let us hope and pray so…for that would indeed be a great gift to the hard pressed American citizenry this Christmas.

Dr. Boyd D. Cathey