I’m
back again. I just want to take this
opportunity to clarify some of the points I had intended to make in my
ACCOUNTING TODAY commentary “Some Truths About the GOP Tax Law”.
Under
tax law prior to the passing of the Tax Cuts and Jobs Act the 2018 personal
exemption was $4,150. For a person or
couple in the 15% tax bracket this represented a reduction of tax liability of
$623. For a taxpayer in the 25% bracket this
represented a reduction of tax liability of $1,038. And so on.
For
a dependent child under age 17 the Child Tax Credit, previously $1,000, is
increased to $2,000. The additional
$1,000 credit is presumably to make up for the loss of the tax savings from the
elimination of the personal exemption deduction. A taxpayer with a “qualifying” child in the
15% bracket comes out ahead. But a
taxpayer in the 25% bracket does not.
The
GOP Tax Act does increase the AGI threshold for claiming the Child Tax Credit –
so it will be available to many more taxpayers than it was under prior
law. It is true that many married
couples in the 25% tax bracket received a reduced Child Tax Credit or no credit
at all under “old” law. In these situations,
the increased credit more than makes up for the loss of the dependency
deduction.
But
taxpayers can only claim a $500 credit for a dependent child age 17 or older,
in many cases college students. A
taxpayer in the 10% bracket would have saved $415 for such a dependent under
prior law, so that person benefits. But taxpayers in all other tax brackets end up
with increased net taxable income. If we look at the new tax rates – 12% of
$4,150 would be just about $500, but 22% of $4,150 is $913, and so on. So, under the GOP Tax Act dependents under
age 17 have more value than those over age 16 as well as non-child dependents
such as elderly parents.
The
elimination of the dependency deduction also adversely affects taxpayers who
had been able to itemize in the past but will no longer itemize for 2018 through
2025 due to the increased Standard Deduction amount. A married couple with no dependents who would
have been able to claim $26,000 in itemized deductions and $8,300 in personal
exemptions will be taxed on $10,300 more
in net taxable income if their itemized deductions are reduced to below
$24,000 by the $10,000 limit on the deduction for taxes and the elimination of
miscellaneous deductions subject to the 2% of AGI exclusion. Granted the tax rates are lower, but the
increase in net taxable income can substantially reduce or eliminate the
benefit of the lower rates. A taxpayer
in the 15% marginal bracket under “old” law could be in the 22% bracket under
the GOP Tax Act.
And if I may add an observation on the corporate tax rate change - it appears that the new 21% corporate tax rate is a flat rate (correct me if I am wrong), and replaces the previous progressive scale. So smaller corporations who had previously paid 15% in federal income tax on corporate profits will get a tax increase and now pay 6% more in tax.
And if I may add an observation on the corporate tax rate change - it appears that the new 21% corporate tax rate is a flat rate (correct me if I am wrong), and replaces the previous progressive scale. So smaller corporations who had previously paid 15% in federal income tax on corporate profits will get a tax increase and now pay 6% more in tax.
The
bottom line is that the GOP Tax Act is not a “massive” tax cut for the middle
class. Whether or not a taxpayer will
benefit from the Act, or actually pay more federal income tax, depends on their
individual facts and circumstances. As I
said at the end of my AT commentary – “In
reacting and responding to the changes made by the Tax Cuts and Jobs Act, one
must look carefully at what the new law actually says and not rely on the
“party” line that is being presented in the press.”
TAFN
