Author: byderesearch

So, we’ve heard a lot recently about the GOP’s new Tax Bill. The problem is… the news and politicians are so polarized that it’s difficult to read information these days that isn’t completely slanted one way or the other. The question I’m sure you’ve probably asked is, “so… will I pay more or less in taxes?”. Without taking political sides, I want to just look at the basic facts to see if this bill helps the regular, middle-class American on an individual basis or not.

• The good thing is that for most of us our overall tax rate will drop. The bill would reduce the current marginal income tax brackets to four from seven — 12, 25, 35 and 39.6 percent — and lower taxes by increasing the income ranges affected by each rate.

Current Rates		Proposed Rates
More than 480.05K	39.6%	More than 1 million	39.6%
424.95K to 480.05K	35%	260K to 1 million	35%
237.95K to 424.95K	33%	90K to 260K	25%
156.15K to 237.95K	28%	0 to 90K	12%
77.4K to 156.15K	25%
19.05K to 77.4K	15%
0 to 19.05K	10%

(Above chart is for married filing jointly)

• The standard deduction is going to nearly double, but at the same time the bill eliminates the personal exception, a deduction based on the number of taxpayers and dependents. This change certainly helps single-filers, but could be detrimental to those of you with many children.

Filing Status	Current Deduction	Current Deduction & Exceptions	Deduction under GOP Bill
Single, no Children	$6,350	$10,400	$12,000
Married, no Children	$12,700	$20,800	$24,000
Married, Two Children	$12,700	$28,900	$24,000

• In order to make up for the above elimination of the personal exception An increase in the child tax credit to $1,600 from $1,000 and a new $300 credit for each parent and non-child dependent were added.
• In addition, they eliminate most itemized deductions except mortgage interest, charitable contributions and state and local property taxes. The mortgage interest deduction would be capped for newly purchased homes up to $500,000, and the property tax deduction would be capped at $10,000.
• A very controversial deduction being removed is the state & local income tax deduction as this would disproportionately affect blue states.

Overall, the vast majority of middle class workers will pay less in taxes under this bill. We’ll be taxed at a lower percentage and will most likely take the standard deduction (at $24K now for married, filing jointly) vs itemizing. The Tax Policy Center estimates that 84% of  filers who current itemize would now take the standard deduction under the new bill. This means that most of will not be affected by the removal of deductions.

A very large debate also continues around the corporate tax rate. Which is proposed to be moving from 35% to 20% (with the exception of pass-through businesses). While most of us may care less if our employer pays less in taxes or not — this too could also benefit us in the long run. While most of the tax savings would likely be reinvested back into these corporations , some may flow through as wage growth. More importantly though, the stock market is anticipating this and has likely priced in  ~80% of the benefit (by my estimation)  into corporations already. This bill could go a long way to maintaining the bull market we’ve enjoyed over the last nine years. This will help our IRAs, brokerage accounts, etc.

In summation, it is clear that this bill will help the majority of American on a personal basis… the bigger question is how this factors into the long-run stability of the economy. Will economic growth brought on by lower taxes be enough to solve for the larger deficit created by lower tax revenue? This remains to be seen. Interestingly… when tax cuts have been instituted on the wealthy it has spurred little economic growth while when tax cuts have been instituted on the middle class it has spurred much greater growth. Time will tell on whether increased growth can close what would prove to be a massive deficit.