Erik Paulsen paints a very rosy picture for “American families and hard working taxpayers across the nation” in his commentary on tax reform, in the March 15 edition of the Eden Prairie News. This is the rest of the story.
It is important to keep in mind that the tax-reform provisions related to corporations are permanent, while those affecting individual taxpayers expire in 2025. As a result many individuals will have higher paychecks in the near term, thanks to the new tax bracket levels and several increased tax credits. However, the tax bracket levels will return to their previous rates after 2025, while many tax credits will expire. Therefore, depending on one’s personal situation, taxes may increase substantially in 2026.
While middle-income taxpayers will benefit, they will do so proportionately less than higher income-earners. For example, a household earning $50,000 to $75,000 will receive an average tax cut of $870, while a household earning $500,000 to $1 million will receive an average tax cut of $21,240.
Some of the biggest changes that affect everyday taxpayers will be around the itemized deductions.
For many lower and middle-income taxpayers who previously chose to itemize, changes to the standard deduction and personal exemption will make taking the standard deduction a better choice. That is because the standard deductions has almost doubled from $6,350 to $12,000 for single filers; from $12,700 to $24,000 for married couples filing jointly, and from $9,550 to $18,000 for heads of households.
At the same time the personal exemption of $4,050 per taxpayer, spouse and dependent is going away this year. These changes negatively impact families with children, because in 2017 a family of five was able to take $20,250 of personal exemptions plus the standard deduction which amounts to a $32,950 deduction. In 2018 the same family would only get the $24,000 standard deduction.
The elimination of the personal exemption is partially offset by an increase of the child credit from $1,000 to $2,000 until 2025. A major change to the new tax law is the $10,000 cap on state and local income tax and property tax deduction.
Corporations will enjoy a capped flat tax rate of 21 percent, whereas the top marginal tax rate was 35 percent. Corporations with profits in excess of $50,000 will now pay lower taxes and those changes in the corporate tax rate are permanent.
The individual mandate, a component of the Affordable Care Act, commonly referred to as Obamacare, that imposes a fine on anyone who goes without a minimum level of health insurance, has been repealed. As a result the Congressional Budget Office estimates that 13 million people will be uninsured by 2027.
For any divorces taking place after Dec. 31, 2018, the alimony deduction will be gone, creating the potential for more difficult and acrimonious divorce settlements in the future.
The student loan interest has been retained in the new law. However, eligible taxpayers can no longer deduct up to up to $4,000 in tuition and fees for qualified education costs, as that credit has expired and was not renewed. In addition, taxpayers will no longer be allowed to deduct tax preparations fees. Furthermore, the criteria for taxpayers to qualify for deducting certain itemized medical expenses has increased from 7.5% to 10% of their adjusted gross income in 2019.
In conclusion, most American families will have lower taxes in the short term. Business owners and corporations will reap big benefits from the new tax bill. The increased child tax credit from $1,000 to $2,000 per child is a boon for parents, but it doesn’t totally offset the loss of the personal exemption. The big winners are the highest income earners.
In addition, the Congressional Budget Office estimates that the tax reform bill will add 1.5 trillion to the national debt.
Melvin Ogurak, Eden Prairie
Eden Prairie News, March 23, 2018