If you have heard that Congress just passed big tax cuts, then you have also probably heard false or misleading information about what is in the bill.
From predictions that millions will die (some people are literally trying to claim that) to rumors that it’s secretly, actually a tax increase (unless, as the story goes, you are golfing buddies with Donald Trump), trying to figure out what is in the tax bill is like playing a bad game of telephone.
So here’s a thoughtful look at a few questions we all have about the new tax reform bill:
What just happened?
For the first time in a generation, Congress passed major tax reform that delivers tax cuts to most Americans and sets the foundation for massive economic growth. The President has not yet signed it into law but is expected to do so over the next few days.
If you’re wondering about the steps the legislation took through Congress, we highly recommend “I’m Just a Bill” from Schoolhouse Rock for wonderful family holiday viewing.
What happens next?
For starters, here is what the economic geniuses at the Tax Foundation expect to happen after the bill is signed into law and starts to take effect:
- Lower marginal tax rates
- Higher after-tax income
- Stronger economy / increased GDP
- Higher wages
- 339,000 new jobs
But didn’t Senator Chuck Schumer tell us “tax breaks don’t lead to job creation.”?
Yes, he did say that.
Is he right?
Well, consider the following breaking news since the tax cuts were passed:
- According to CNBC, AT&T announced $1,000 bonuses for more than 200,000 unionized U.S. employees.
- Comcast also announced $1,000 bonuses for more than 100,000 non-executive employees.
- Fifth Third Bancorp announced it would raise its minimum wage to $15 per hour for about 3,000 employees. Also, 13,500 employees (excluding senior managers and executives) will receive a $1,000 bonus this year.
- Wells Fargo will also raise its minimum wage to $15 and announced a plan to give $400 million to community and nonprofit organizations next year.
- According to TIME, Boeing announced that it plans to spend $300 million on “employee-related and charitable investments” because of the tax plan.
So, he was totally wrong?
But… why would he say that?
Sadly, that’s politics. Many politicians have a vested interest in keeping more of our money. It’s just part of their view that government does a great job, so it needs more money to do more things. Do you agree?
Wow, politicians are the worst. Anyway, where were we?
We were talking about the tax cuts just passed by Congress, resulting in lower taxes, higher wages, and more jobs.
Ah, that’s right. So what is actually in the bill?
Several boosts for both individual taxpayers as well as the companies who employ taxpayers. Among the highlights:
Higher standard deduction. More Americans will be able to simply take a standard deduction on their taxes without filing itemized expenses and digging through boxes of receipts. The standard deduction has jumped from $6,500 to $12,000 for individuals and from $13,000 to $24,000 for married couples.
Expanded Child Tax Credit. Little ones are expensive, so both single and married tax filers can take a $2,000 deduction for each child (up from $1,000 before). The tax credit is fully refundable up to $1,400 and begins to phase-out for families making over $400,000.
Preserving the Adoption Tax Credit. This tax credit specifically offers tax relief to the amazing, wonderful, heroic families who adopt a child and was preserved.
Expanded medical expense deduction. Americans with expensive medical bills can deduct those expenses at a lower threshold than the previous law. CNBC has more details here.
Eliminates the Obamacare individual mandate tax. The mandate that every American must buy health insurance has been at the heart of much of the opposition of the disastrous health care regime. With this change, Americans will now have more choice and flexibility in their health care options, but further reform is still needed to restore quality care and innovative treatment for the American healthcare system.
Improves educational savings plans. The popular 529 accounts currently used to save for higher education can now be used for elementary and secondary education as well. A provision that would have allowed 529 funds to be used for homeschool expenses was removed at the last minute.
Exposes inequality of high-tax states. Many states have high local and property taxes. Under the previous tax code, residents of these states could deduct state and local taxes (SALT) from their federal taxes. This gross injustice almost incentivizes states to have higher taxes, because residents get a federal deduction for them. It’s a warped system and while the final tax bill does still allow taxpayers to deduct up to $10,000 in either property and either sales or income taxes, that cap helps expose the inequality and hypocrisy of high-tax states that force others to take on the burden of funding the federal government. This change hopefully will lead to more equitable state tax reform.
Why do I keep hearing people are going to die?
As with Sen. Schumer’s false, partisan comments, insistence that every act of Congress will unleash Armageddon is a reflection of the sad state of our politics today. There’s all sorts of outrageous accusations out there from people who have all sorts of reasons to oppose it. Some don’t want Republicans to get credit for doing something good for Americans. Some are upset their special carve-outs weren’t included. Some simply don’t understand but would never admit it, so they have to say something.
As you evaluate the facts of what is, and is not, in the new tax cuts and what will, and will not, happen, you’ll be in better shape to sort through the extreme rhetoric.
Why are people freaking out about charitable donations?
In the current tax code — and under the new policy — you can deduct donations to non-profit organizations with tax-exempt status under IRS code 501(c)(3). So generally if you give money to local food bank, church or other similar civic organization, you can write off that donation from your taxes.
That does not change in the new policy. What does change is that the standard deduction (an amount you can write off immediately without pouring through receipts) is now double what it was before (now $12,000 for single filers, $18,000 for heads of household, and $24,000 for joint filers in 2018, compared to $6,500, $9,550, and $13,000 respectively under current law).
Thus, the concern is that since more people are likely to take the standard deduction instead of itemizing deductions (aka “boxes of receipts) then the argument goes that they are less likely to donate to charitable causes. This feels pretty jaded, but we will have to see how it works out. Ideally, you would be able to deduct any charitable donations regardless of whether you take a standard deduction or itemize.
Hopefully Congress keeps that on their to do list.
So are my taxes actually going up, or down?
Most likely your taxes are going down. Maybe staying the same. According to an analysis of prior tax returns by The New York Times, about 75% of tax filers would receive a tax cut.
The Tax Foundation has an excellent breakdown of the various scenarios of middle class families and how their tax bill would change. You can check it out here.
Thank you for walking me through this! I feel so much better. How can I help spread the word?
You’re too kind! We’re grateful you’ve taken the time to read our Q&A.
Please help share this thoughtful perspective by clicking one of the buttons below, or by printing it out and mailing it to your darling but misguided niece who still thinks Obamacare will turn out okay.