LET ME MAKE THIS PERFECTLY CLEAR

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.  

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