As year 2017 comes to a close either the U.S. Congress will pass tax reform or it will not. The conclusion at the time of this writing is yet unknown. Congressional Republicans expect to act by Christmas and, if the proposed Tax Cuts and Jobs Act does not pass before the end of the year, the new Democratic Senator from Alabama, Doug Jones, will be sworn in to make the proposal even more of a squeaker for passage than before.
I usually try to wait to discuss new proposed legislation at least until we know what it is likely to say but, at the risk of dealing with legislation seriously in flux, so much so that handwritten notes are scribbled in margins, enough is known now between the Senate and House versions to be able to make some overall observations. Here they are based loosely on the National Society of Tax Professionals, NSTP Blog, https://NSTP.org/blog, “Tax Cuts and Jobs Act H.R.1 Comparison of House and Senate Bills as of December 06, 2017” and reports including Congressional Budget Office. The comments based on review are my own.
- The new Code itself is not simple. Simple is in the eye of the beholder but, if the idea is the Tax Code will suddenly shrink and accountants will toss their books in favor of a slimmed down version, this is not the case. If passed, accountants will need new books. However, if simple means fewer deductions and credits are available, this might qualify as simple. The expected legislation from the Trump forces was supposed to provide that average individuals could file their tax return on a postcard. That observation could still be true, but, where true, it would be because many common deductions are scaled back, limited, or eliminated entirely but the Senate and House versions are very different. The standard deduction is increased, however, so fewer taxpayers would itemize, but personal and dependency exemptions would be repealed. Whether you are disgruntled or pleasantly surprised will depend on your circumstances.
- It will, if passed, add to the federal deficit. While extremely optimistic views suggest the economy will be so energized it will continue its upward swing indefinitely, this has not been the historic pattern of highs and lows. The government would need to borrow to sustain the tax breaks. CBO projections indicated a deficit of $1.4 trillion over 10 years.
- Corporations would benefit. The corporate tax rate would drop to 20% in both earlier versions although there may be a slight adjustment to this number. The effective date could be 1/1/2018 or 1/1/2019. “Passthroughs” that is corporations that are, generally speaking, smaller and may be Sub-Chapter S corporations or Limited Liability Companies have been the subject of discussion. However, service businesses such as accountants, lawyers, doctors, and other small businesses where the owner is actively engaged in the business are not expected to benefit although this could change. The benefit of the lower rate is intended for passive income.
- Average individuals are likely to benefit slightly but corporations and high wealth individuals would benefit much more. Televisions ads in favor of the bill project savings of about $100 per month for average individuals and families. The drop in the corporate tax rate would be substantial from a high of 39.6% to a maximum of 20% or 21%. If the individual mandate requiring individuals to have health insurance under Obamacare is eliminated it would be expected the government would pay much less in subsidies and this has been built into some versions of the proposed legislation. If this is the case, according to the Congressional Budget Office there would be an estimated 13 million fewer people with health insurance by 2027 and the rate for those in the individual (nongroup) market paying their own insurance would be 10% higher than the projected base rate. In other words, there would be a relatively small decrease in taxes for average individuals and families but, if insured and not able to be covered by group health insurance plans there would be an increase in health insurance premiums.
- Stay tuned for reductions in Medicare, Medicaid and other programs. To reduce the deficit money would need to come from somewhere.
Discussion of specific deductions will need to wait for a later column.
Esquire, Colliton Law Associates, P.C. Janet Colliton has practiced law for over 38 years, 37 of them in Chester County, Pennsylvania, a suburb of Philadelphia. Her practice, Colliton Law Associates, PC, is limited to elder law, Medicaid, including advice, applications and appeals, and other benefits planning including Veterans benefits, life care and special needs planning, guardianships, retirement, and estate planning and administration.