The Republican tax proposal, the Tax Cuts and Jobs Act (TCJA), was passed by the Senate in early December 2017 and is now headed to a reconciliation process that will try to combine the House-passed version with the Senate one. The chance that the bill will be reconciled successfully and sent to President Trump for his signature is almost certain.
The only uncertainty left is whether a few controversial pieces of the puzzle will be whittled out, or whether any new items will be shoe-horned in.
Is anything “hiding” in the proposal? The answer to that question depends on the definition of “hiding,” but it’s fair to say that at least a few little surprises are buried in the bill, and the majority of taxpayers won’t realize what they are until sometime in 2019.
Surprises in the Bill
Standard deduction: Doubling of the standard deduction is good news for most taxpayers, but is almost wholly offset by elimination of the personal exemption. You’ll have to do a lot of math to find out whether your tax bill will go up or down under the new bill.
Bracket changes: Check your new bracket, if you’re in a new one, to see what the direct effect is on your bottom-line tax bill. Not everyone will be moving to a new bracket, and even those who do might not fare better.
Small business taxes: If you are the owner of a small business, there could be some key provisions in the TCJA that will cap your tax rate at 25 percent on “business income.” The surprise here is that the legislation does not define business income, so it’ll be interesting to see whether a strict definition is added during reconciliation.
To itemize or not: Deciding whether to itemize will now be a major decision with larger repercussions than before. To take advantage of any itemization, you’ll have to forego the now much larger standard deduction. April, and the weeks leading up to it, are going to be very busy times for tax accountants and individuals who prepare their own returns. Choosing incorrectly to itemize or use the standard deduction could cost you hundreds or even thousands of dollars in higher taxes.
Healthcare: If you are a member of any of the ACA Obamacare exchanges, watch for your premiums to go up, a little at first, and perhaps much, much more a couple years from now. Have an alternative health strategy ready because the elimination of the individual mandate likely spells the eventual crash-and-burn of ACA exchanges.
The Future of the ACA (Obamacare)
Barring some last-minute haggling, and a surprising breakthrough by the pro-ACA forces in both parties, the individual mandate is probably dead. That will almost certainly mean the end of Obamacare as we know it. Without the mandate, the exchanges will be unable to lure enough healthy people into their plans to balance out the unhealthy, lower-income people who are already in.
That, according to most on both sides of the question, means that the ACA will default within a year or two, at the latest, and maybe much sooner. Even before the full provisions of TCJA go into effect, the mandate would be deep-sixed and people would start purchasing insurance plans outside of the ACA exchanges. The country could revert to the insurance environment that was in place before the ACA was passed almost seven years ago.
Is the Bill a Smart Way to Amend the Tax Code?
The short answer: probably not. Even many in the president’s own party think the TCJA is bad economic policy. Except for a few partisan economists like Larry Kudlow, the majority of unbiased experts think this bill will increase the deficit in the long run and either not do much, or do some damage in the short run.
Individuals who reside in high-tax states will not see a reduction in their tax bill, due to the elimination of the SALT (state and local tax) deduction that currently exists. And families with several children will see little tax relief that the bill is supposed to deliver because they’ll be unable to take multiple personal exemptions as they are currently able to do.
When you get down to it, it’s pretty hard to line up very many people who will benefit from the plan except for some corporations and families who have one or two, or no, children. Even in those cases, the benefit amount is not much, except for large companies.
The fallback argument of the bill’s proponents is that TCJA will spur business growth and pump up the economy. But even if that hope turns out to be true, and there’s no solid evidence that it will, the TCJA can hardly be called a “tax cut” or “jobs act” for any of the key demographics of the taxpaying public.
What to Watch For
DACA: Watch for what the combined bill deletes or adds in. There is some wiggle room on DACA, the Dreamers Act, which allows large numbers of younger immigrants to stay in the U.S. without risk of deportation.
Brackets: There could be a change in the number or size of income brackets because the House and Senate bills were far apart on that issue. There’s currently a push for reducing the number of brackets to just three, but it’s more likely the Senate version with its 4 brackets will prevail.
Alternative Minimum Tax, Estate Tax, and Personal Exemptions: These three parts of the tax code are likely dead on arrival, and will be a part of the combined bill that President Trump will end up signing.
State and Local Tax Deductions: SALT might end up being rearranged and possible added back in. The House and Senate versions of TCJA both removed the deduction, which has become one of the most hotly-contested parts of the legislation. Watch for a compromise of some sort on this issue, and the eventual inclusion of some form of state/local deduction.
Mortgage Interest Deduction: The mortgage interest deduction still exists in the bill, but has been cut to allow only for loan balances that are less than $500,000. There could be a last-minute dash by some powerful forces in both parties to restore the $1 million limit.
401k and IRA Deductions: These two beloved deductions were originally going to be chopped from the tax code, but the outcry from leaders of both parties was so loud that the president’s team relented and put the deductions back in. Watch for some last-minute attempt by the Trump team to try and remove one or the other from the bill. The smart money is on these two deductions being included in the final version that heads to the president’s desk.