The Tax Cuts and Jobs Act of 2017 was passed today. It’s a monumental tax bill. It’s a major victory for the Republican Party. How will this act impact you and your finances?
Hello, my name is Paul Carroll. I’m the CEO and founder of Efficient Wealth Management, a boutique wealth management firm. This video is very much focused to our clients and those people who would be clients for us, so there’s a number of provisions that we may not discuss in detail. But the two major areas of concern are personal income tax and business income tax. And then, finally, we’ll discuss briefly what is the impact – will this actually do good for the economy?
On the personal income tax side, briefly, the brackets drop from 10 to 7. The top threshold is $600,000. And the lower rate for the top threshold is 37, dropped from 39.6. The AMT exemption is going to be increased to a million dollars, and there will be increased standard deductions, child tax credits and deduction for medical bills. Also, we’re seeing a double in the estate tax exemption to $11 million for couples.
Texans are going to be impacted by this if they have large homes and large mortgages, because this act limits the deduction of state and local property and income taxes to $10,000 a year. It’s really an end of the implicit subsidy to three or four high-income-tax states, but it does affect people who own large and expensive properties in Texas. Also, if you have a large mortgage, the interest deduction will only be on the first $750,000 of the mortgage.
For businesses, this is where the bill does the most good. The business tax rate of 35% is significantly higher than the global average, and the new tax bracket of 21% is much more in line with the rest of the world. Of course, to make that happen, a number of deductions have to go. And there’s also going to be less deductibility of interest expense. Some of these things are on the dream sheet of economists, for efficiency, both from a corporate-tax point of view, and also from an economic point of view.
We’re also seeing an elimination of the global taxation on American corporations, and this is probably 50 years overdue. It’s one of the most difficult taxes to get rid of because it’s a technical tax, and almost nobody knows that American corporations are taxed globally, which everyone else in the world taxes on a territorial basis. And the result of this has been huge corporations like Apple having billions and billions of dollars locked up overseas. They are now going to be able to repatriate those dollars back to the United States, with all the long-term benefits that will entail. There will be an improved treatment of LLCs and pass-through entities, but frankly, that’s such a complex part of the bill, that it is not within the scope of this discussion today.
So, how will this bill affect the country, because in the end it will affect you. A $1.4 trillion boost in the debt over the next 10 years. That’s a pretty significant boost, but it’s a percentage of the total deficit. It’s actually about 2%. However, the economy is running at full capacity right now. Most economists would agree with that statement, so you could argue that we don’t need this tax cut at this point in time. It’s ill-timed. We really should save our powder for when we’re in a recession. That is the case that’s made, but sometimes politics and recessions don’t align.
With a predicted debt-to-GDP ratio of 91% by 2027, and unfunded Medicare and Social Security liabilities, clearly this bill isn’t going to stick. What we hope is that the tax reforms on corporations stick, because they’re way overdue, and they are good from an economic perspective. But the demographic baton is being passed from the baby boomers to the millennials and Gen-X, and those guys are going to be picking up the tab, not just for this, but also the recovery of the Great Recession. And so, it’s almost guaranteed that as soon as this administration is out of office, the personal income tax provisions will snap back fairly significantly. It’s really just a matter of not if, but when.
However, if the corporate provisions stick, if the improved efficiency in corporate taxes stick, then this bill actually could be, assuming this snap back in tax rates over the next few years, a net good for the economy in general. For our clients, we’ve run some models. Expect about a 7% to 10% cut in your taxes. For America as a whole, that cut will be significantly smaller. Of course, you want to talk to your tax advisor for final professional advice and confirmation of these details.
We wish you the best of investing success. Merry Christmas and a Happy New Year.
Sources:
C., H. “Growing the Deficit: The Senate Passes a Tax Bill.” The Economist, The Economist Newspaper, 2 Dec. 2017, www.economist.com/blogs/democracyinamerica/2017/12/growing-deficit.
Farber, Madeline, et al. “Congress Votes on Tax Bill: What the ‘Tax Cuts and Jobs Act’ Means for You.” Fox News, FOX News Network, 20 Dec. 2017, www.foxnews.com/politics/2017/12/20/congress-votes-on-tax-bill-what-tax-cuts-and-jobs-act-means-for.html.
Foundation, Tax. “Preliminary Details and Analysis of the Tax Cuts and Jobs Act.” Tax Foundation, Tax Foundation, 18 Dec. 2017, taxfoundation.org/final-tax-cuts-and-jobs-act-details-analysis/.
Petulla, Sam, and Tal Yellin. “See How the Tax Bill Affects Your Paycheck.” CNN, Cable News Network, 20 Dec. 2017, www.cnn.com/2017/12/13/politics/calculate-americans-taxes-senate-reform-bill/index.html.
