By Jim de Bree
The GOP is heralding middle class tax cuts. For example, U.S. Rep. Steve Knight is running television advertisements promising a simpler tax system “so that workers can see more money in their paychecks every month for them and their families to enjoy.”
Although I am retired, I still prepare a number tax returns for friends, family and a few paying customers. I prepared an analysis for each of these taxpayers assuming that the Trump tax proposals were effective in 2016 and compared the tax under the Trump proposals with their actual 2016 tax liabilities.
About 75 percent of them saw a tax increase. Since many of the Trump proposal details are yet to be worked out, obviously this analysis is a work in progress.
The calculus of the Trump proposals is as follows:
• Existing tax brackets are combined into fewer brackets with lower rates;
• Certain deductions are repealed.
For those who are not familiar with tax return mechanics, let’s summarize how deductions work under current law. You are allowed two sets of deductions. The first is the greater of itemized deductions or the standard deduction. The second is a personal exemption of $4,050 for each taxpayer and dependent.
The majority of itemized deductions claimed are home mortgage interest, charitable contributions and state and local taxes. Most people who itemize their deductions are homeowners. For those whose itemized deductions are less than the standard deduction, most taxpayers can claim the standard deduction.
Under current law, taxpayers may claim a standard deduction of $6,300 if single and $12,600 if married. Furthermore, each taxpayer is allowed to claim a personal exemption of $4,050 for themselves and each dependent.
The Trump proposals eliminate personal exemptions.
The standard deduction is increased to $12,000 for single taxpayers and $24,000 for those filing jointly.
The proposals also eliminate the itemized deduction for state and local income taxes, which will cause many who currently itemize their deductions to claim only the standard deduction in the future. For many of these taxpayers, their new standard deduction will be lower than their current itemized deductions.
Generally, people with no dependent children who currently claim the standard deduction will end up with a lower tax bill. My analysis suggests that many such middle class single taxpayers will save between $1,000 and $2,000.
Married couples similarly situated will save twice that amount. These folks win because they not only benefit from the rate cuts, but they also are allowed to claim additional deductions.
An exception is for taxpayers aged 65 and older who currently claim extra personal exemptions that are disallowed under the Trump proposals. They will generally see a smaller benefit because they are giving up more exemptions.
A similar dynamic affects taxpayers with dependent children. A family of four earning $75,000 and claiming the standard deduction will more or less breakeven. Their loss of the $16,200 in personal exemptions offsets the benefits of the increased standard deduction and the rate reductions. If that family has more than two children, they will pay higher taxes under the Trump proposal.
The Trump administration has promised an enhanced child-care tax credit to reduce these families’ tax burden, but it has not provided any details to date.
For those who itemize their deductions, the story is typically worse. Frequently, the loss of the deductions for state and local taxes more than offsets the benefits of the rate reductions.
Let’s look at that family of four earning $75,000, but let’s assume that family owns its home and itemizes its deductions. According to IRS statistics, an average return with $75,000 of income claiming itemized deductions claims about $18,000 of itemized deductions. That family’s tax bill increases by $200 under the Trump proposals.
People who own rental properties will be especially hard hit because they usually finance their properties using a mortgage. Since the Trump proposals also repeal the deduction for interest on business debts, rental-property owners’ taxable income increases significantly. One client who owns several rental properties will see his tax more than double.
By comparison, I considered the case of a former client who is a wealthy individual earning about $4.2 million annually. While the mechanics of his tax calculations are too complex to explain here, his taxes are reduced by nearly $500,000 under the Trump proposals.
Although my analysis is anecdotal, it nevertheless provides a rather informative glimpse of winners and losers under Trump tax reform. Clearly many workers with families will not experience the joy of extra money in their paychecks.
Congressman Knight has asked voters for their input on tax reform. I hope that he reads this column. You might want to ask your tax adviser how you will fare under the tax reform proposals. After you do, please take the time to let the congressman’s office know how much extra money will go into your pockets. He might be surprised to hear your amount.
Jim de Bree is a retired CPA who has spent more than 40 years specializing in tax matters and studying tax policy.