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The new tax code?

Our new president hasn’t been sworn in yet, but he does have a tax overhaul proposal that has a decent chance of passing. Every change has winners and losers. Even changes that seem positive when first announced. One key provision of the new plan is to bump the standard deduction, from $6,350 single / $12,700 joint to $15K/$30K. Sounds great, right? But as they say, there’s no free lunch, and the personal exemptions are taken away. $4050/yr per person in 2017. Sounds simple, but it impacts taxpayers very differently, based on their circumstances.

  • A couple who doesn’t itemize – Their exemption + deduction (E&D) rises from $20,800 to $30,000. $9,200 less taxable income.
  • A couple that has $35000 in itemized deductions – They still itemize, but lose their exemptions. $8,100 higher taxable income.
  • A 3-child couple who doesn’t itemize – Their E&D drops from $32,950 to $30,000. $2,950 higher taxable income.
  • A 3-child couple that has $35000 in itemized deductions. They still itemize, but lose their exemptions. $20,250 higher taxable income.
  • Single Parent with 3 kids, taking Std deduction – Their E&D drops from $25,500 to $15,000. $10,500 higher taxable income. Ouch.

The plan also collapses the marginal rate structure a bit. trumptaxplan A couple with a taxable $75,000 in 2017 would have a tax bill of $9000 vs the current (2017) $10,317. For the first couple above, the non-itemizer, it’s just gravy, a bit of extra savings. For the itemizers with kids, it only offsets a tiny bit of the high total tax due.

For my family, our deductions are above the new standard deduction amount, so we will see a loss of the $12,150 in exemptions if the new code takes effect. On the flip side, there’s an interesting strategy that might help those who are in a similar position, with itemized deductions that are over this new (proposed) limit. A topic for the next article.

  • Dilip Sarwate November 28, 2016, 10:36 am

    It is interesting to note that only the first of your five examples gets lower taxes. The fifth example is particularly saddening; single parents with children are usually struggling to make ends meet and they don’t really need to have America made great again.

  • dave November 28, 2016, 11:52 am

    And how does this affect Senior and/or Disabled exemptions?

  • Joe November 28, 2016, 1:10 pm

    All exemptions are gone in favor of the higher standard deductions. But, again, this is just a proposal.

  • Joe November 28, 2016, 1:14 pm

    Yes, that’s true. Hopefully, the final draft will take this into account, and offer something else for those with children. Right now it looks harmful to the people needing the most help.

  • Young Finance Guy December 1, 2016, 3:28 am

    Wait so only the couple with no kids will win here?? is that correct? I swear I was a finance student and I always did better than my classmates in college… But taxes confuse me… that and counting votes for elections.

    Also slightly off topic… this whole let’s increase jobs by lowering corporate tax thing… IDK how that is suppose to work. I feel like the tax owed on payroll would have to go down. under the new way every dollar cut from payroll will be even more valuable (bc the owner pays less tax on it as that dollar is now profit and taxed) and every dollar added to payroll will be less valuable (kinda, this assumes the alternative is to keep that dollar as profit which wil be taxed less by trump and thus more valuable). I guess the thought is this…. if rich folks have more money they will be more likely to spend it on hiring someone… i don’t think that is how it works…. you will hire folks that make you money…. you don’t hire folks because you have more money than you did. Or maybe I am wrong and should stick to picking undervalued stocks.

  • Joe December 1, 2016, 10:01 pm

    The problem with the trade-off is that if you have more kids, you don’t get any extra exemptions. So, as it stands, the couple with no kids (or the single people) might gain from the higher exemption, but those with multiple children are likely to lose out.

    The rest of your comment is right, in my opinion, and unfortunately. Wages paid to lower wage earners have high velocity, e.g. give a $10/hr earner a $5/raise, and that $10K/yr is nearly all spent. Give it to a $100K worker, and it’s likely to get saved, not spent. The only thing I hope is that new tax code incentivizes companies to repatriate money and build factories in the US. That would be a good thing.

  • snoopy369 December 6, 2016, 12:37 pm

    Lowering corporate tax is fine, in my opinion, but it has to be correlated with a raise in the tax on income for high earners (either regular income or capital gains) in a way that actually works to keep it revenue neutral at least. Simply lowering corporate tax with nothing else is just a tax cut for high earners.

  • Joe December 11, 2016, 2:42 pm

    I understand your point, and you may be right. But. Corporations have three purposes. They serve as an investment. Not just for the rich, but for anyone that can open an account and invest via a mutual fund or ETF (or individual stock shares, of course.) They employ people. And they produce things we need to buy.

    Taxes are an interesting thing. In theory, when we tax something, we get less of it. If companies in the US had a lower corporate tax, they’d be less inclined to move outside the US, and we’d get more jobs here. There’s over $2T (<--- that's trillion, a 2 with 12 zeros) overseas that's not coming back to avoid taxes. I'm thinking that in a perfect world, we'd find a way to encourage that money to return in exchange for new jobs created. Hey, Apple, you build a plant in the US that employs X number of workers, and you can repatriate $XX to do it. Even if the money returns untaxed, the jobs will add taxes to the system.

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