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The Republican tax plan, how it may affect you

November 22, 2017

In the photo, Paul Ryan (Rep. Wisconsin) speaker of the House and a prime architect of Republican tax plans.

 

Be prepared. Don't be shocked. Know the details of your present tax situation. Get out a copy of your 2016 federal tax forms. This will help you understand how the Republican plans may affect you in the 2018 tax year when some version of the plans may become effective. For the 2017 tax year for which you must file your returns by Tuesday, April 18, 2018 the tax law has not fundamentally changed from the previous tax year.

 

The recommendations here are for individual personal income tax returns and is general in nature. Individual personal tax situations can be very different and so we don't cover all that can apply to specific cases. Nor do  we address taxes for businesses or corporations, most of which will hire professional tax advisers and tax preparers and accountants.

 

Individual or family tax filers should have copies of their 2016 tax forms whether someone in the family did the forms manually and filed them or whether they used a software package on a computer to prepare and file the forms or whether they used a professional tax service to do it for them.

 

If you or someone in the family prepared your tax returns you will more likely be familiar with the details of your tax situation than if you used a tax service to prepare your taxes. But even if you prepared your own tax returns, but used a computer software program to complete your returns, you may be fuzzy about some of the details, since many of these software programs can hide much of the detail from you as you follow their directions. If you used a professional tax service you may be even more in the dark about the details of your tax situation.

 

When you locate that copy of your 2016 tax form, start by looking at the first page of your Form 1040. Look at "Filing Status," and note weather you filed as a single tax payer, married filing jointly or married filing separately, and then note if by 2018 tax year - the year the tax bill will be effective - your filing status may change.

 

The next number to look at is how many dependents you claimed (line 6d of 1040) and then note if this number will be different in the 2018 tax year.

 

Then look at line 22 of the Form 1040 to find your total income for 2016. Make a note if you expect your income in 2018 will be substantially different and if so what the number may be in 2018. Then look at line 37 of Form 1040. The number recorded there will be your adjusted gross income. This may be different from your total income if you have any adjustments you were entitled to such as education expenses, moving expenses or interest on student loans. As always, note if any of these are likely to change in 2018.

Next look at line 40 of the 1040. This number is the amount of deductions you were able to subtract from your adjusted gross income to get your taxable income. If this number is $6,300  or  $12,600 or $9,300 then you took the standard deduction, and the number only varies by your filing status, e.g. whether you were single or married filing jointly with your spouse or as a "head of household." But if  the number on line 40 is none of these three entries, but something larger, then you itemized your deductions on Form 1040 Schedule A.

 

Line 44 records the federal income taxes you may have had to pay in 2016. I say may, because you may have been subjected to the "Alternative minimum tax." If so your minimum tax is what you may have paid. That will be recorded on line 45 of the 1040. We know that one well known tax payer, Donald Trump was subject to this alternative minimum tax when he paid $31 million in taxes in 2005. This is the only thing we know (from a leaked page of one of his returns) about  Trump's taxes, since he has refused to release his tax returns as other presidents and presidential candidates have done. You are only likely to be subject to the alternative minimum tax if you had fairly large income and a lot of itemized deductions. The AMT begins to apply at $129,700 in income for single filers and $160,900 for married couples who file jointly.

 

So far you know what your 2016 federal income tax liability may have been from line 44 of the 1040, or, if you were liable for the alternative minimum tax, from line 45 of the 1040. I say may have been, because you may have been entitled to tax credits which can be subtracted from your tax liability. These are listed in lines 48 through 54. See if you had any of these credits in 2016. Most notably note if you had credits for child care or dependent care or education credits or retirement savings credits as these are the most likely things that might change under the Republican tax plans. If you had any of these tax credits they will have been subtracted from you tax liability and the result recorded on line 56 of the 1040.

 

Finally, there may be other taxes or payments you have to add to your tax liability. If any, these are recorded in lines 57 through 62 and added to your total taxes owed in 2016. Line 63 records the total taxes you owed in 2016. Of special interest may be line 61, "Health care: individual responsibility." This is the penalty or tax that you must pay if you failed to maintain health insurance coverage under the Affordable Care Act, commonly referred to as Obamacare.

 

Now if you itemized your deductions in 2016 and think you may want to do that again and have similar levels of deductions in 2018, look at your 2016 Schedule A of the 1040.

 

The first item on the list of itemized deductions is for medical and dental expenses that you paid out of your own pocket. Line one is where you find the total medical expenses that you paid out in 2016. You can only deduct medical expenses once they amount to a certain amount of your adjusted gross income. You will find the amount you can deduct listed on line 4 of Schedule A. Usually medical deductions only amount to substantial deductions if there is a major illness, major dental expenses or nursing home expenditures that has to be paid for. But for people that have one or more of these expenses, the medical deduction can be a big help. And it is one of the deductions slated for elimination by versions of the Republican tax plans.

The next item on Schedule A is the deduction for state and local taxes. These are for state income tax payments, or alternatively for state sales taxes, and for property taxes. The total for these are listed on line 9 of Schedule A. These deductions can be especially helpful to those who live in relatively high tax states and/or high property tax localities. Versions of the Republican tax plans propose to eliminate or limit the state and local tax deductions.

 

The next major deduction on Schedule A is the one for gifts to charity. The total of this deduction in listed on line 19 of the schedule.

 

Deductions for uninsured casualty losses due to accidents or forces of nature to your home or other property or losses are listed on line 27 of the schedule.

Total itemized deductions are on line 29.

 

Now that you have got up to date on some of the details of your 2016 tax forms you will be in a better position to figure out if you may gain or lose from the Republican tax plans.

 

In general the Republican plans are for fairly large "permanent" tax cuts for corporations and to some degree for other businesses (by permanent we mean there is no date for when the tax cuts expire), and for some modest tax cuts for lower and middle income tax payers that will expire in 2025, so this is a temporary tax cut for them. The biggest the proposed tax cut for business is the cut in the corporate tax rate to 20 percent from the current rate of 35 percent. Some versions of the Republican plans also lower taxes on small businesses.

 

Versions of the Republican plans eliminate the alternative minimum tax which is primarily paid by higher income tax payers. They also eliminate the estate tax, again only paid by those who inherit large estates from high income and high wealth individuals.

 

The Republican plans also change the tax rates that apply to different income levels and the House passed bill reduces the tax brackets from the current seven to four. These changes can move middle income families to either a lower or higher tax bracket than they now face depending on where in the hierarchy of middle incomes they fall.

 

The Republican plans reduce the amount of home mortgage interest rate deductions, reduce or eliminate the amount of state and local taxes deductions. They reduce or eliminate the medical and dental deduction and the deduction for casualty losses. They reduce or eliminate the deduction for interest on student loans.

 

In return for the loss of these deductions versions of the Republican plans raise the standard deduction to $24,400 for married couples who file jointly and to $12,200 for single filers. However, the plans also eliminate the $4,050 deduction for each dependent deduction, the number of dependents listed on line 6d of your Form 1040.

 

The biggest blow to lower income and middle income families and couples and individuals may not be the tax changes themselves, but may stem from the tax cut effects on the federal debt. The cuts are projected to increase the debt by $1.5 trillion dollars over the next 10 years. This added debt in addition to the expected rise in the debt projected under current law will increase pressure for federal spending cuts as this debt rises. And increasingly, the targets of programs to be cut will be those that help the lower and middle income classes, programs that are called the "entitlements," namely Medicaid, the "nutrition" programs like food stamps, welfare programs, Medicare and Social Security.

 

Republicans claim that the tax cuts on corporations and other businesses will spur them on to make investments that will spur economic growth, increase productivity and raise wages. Almost no credible economic studies are available that suggest such a result will be forthcoming.

 

One final note. As an economist, I can't figure out why in the world Republicans want to cut taxes while we are at or very near full employment, the federal government budget is still in deficit and wages look very much like they are beginning to rise. This is not an economy that needs the stimulus of federal government deficit spending. Unless of course Republicans aren't really disturbed by government deficits as they have so often claimed. In fact, they may look at deficits and debt as a tool they can use as pressure to cut government programs they don't like and believe never should have been funded in the first place, but yet don't have the votes nor the guts to directly propose cuts to these programs.

 

If they can cause the federal debt to rise to disturbing levels they can argue that we need to cut these programs to reduce the debt, while all the while they are the ones who starved the government revenue stream with their ill timed tax cuts in the first place.

 

References: More on the Republican proposed tax plans at

https://www.cnbc.com/2017/11/03/the-good-the-bad-and-the-money-what-the-gop-tax-plan-means-for-you.html

 

 

 

 

 

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