As a tax professional who has been preparing 1040s for individuals in all walks of life for over 45 years, I have paid close attention to the details of the new tax law that will affect tax returns for 2018 through 2025.
While not the disaster that the Democrats insist it is, the Tax Cuts and Jobs Act is not the “massive tax cut” the Republicans claim. For a large portion of the middle class, the benefit of lower tax rates is wiped out by the loss and limitation of deductions, and, in some states, can actually result in a net tax increase.
And the bill most certainly does provide substantial, if not “massive,” tax cuts for wealthy taxpayers like President Trump and his family.
Let us take a look at the truth about some of the effects of the GOP tax act.
While the new standard deduction amounts are technically almost double what they were under previous tax law, with the elimination of the personal exemption deduction for a taxpayer and spouse the actual additional deduction is much less.
Under the old law, a single filer could claim a standard deduction of $6,500 and a personal exemption of $4,150 in 2018, for a total of $10,650. Under the act, that filer gets a standard deduction of $12,000, but no personal exemption. The net tax income has been reduced by $1,350. The deduction is increased by $2,700 for a married couple. A tax cut, true. But not “double,” and certainly not “massive.”
For taxpayers who are still able to itemize under the new act, the elimination of the personal exemption deduction means net taxable income is actually increased by $4,150 or $8,300. This increase in taxable income is substantially more for my clients, most of whom are from New Jersey, and taxpayers in other highly taxed states like New York and California when you factor in the $10,000 limitation on the itemized deduction for taxes. While the tax rates are slightly lower, the bottom line is that these taxpayers will be getting a tax increase and not a tax cut.
The doubling of the Child Tax Credit from $1,000 to $2,000 will also result in a tax increase for many taxpayers. For taxpayers in the old 10 percent and 15 percent brackets the tax benefit of a personal exemption would have been $415 or $623, so there is a tax cut here. But those in the 25 percent and 28 percent brackets would have received a tax benefit of $1,038 and $1,162 – so their tax has been slightly increased. This reduces the overall benefit of the lower tax rates.
And what of replacing the personal exemption for other dependents who do not qualify for the $2,000 Child Tax Credit? Only taxpayers in the former 10 percent bracket actually see a tax cut. As explained above, under the old law, taxpayers in the 15 percent, 25 percent and 28 percent brackets would have received a tax benefit equal to $623, $1,038, and $1,162. A bigger tax increase here, again reducing the benefit of the lower tax rates.
There has been much talk about the effects of the limited $10,000 ($5,000 if married filing separately) itemized deduction for property taxes and state and local income or sales taxes combined in the act. One little-mentioned effect is that this limitation substantially increases the “Marriage Tax Penalty.”
Two working single individuals, either living together or separately, who itemize can each claim a deduction of up to $10,000 in combined property taxes and state and local income or sales taxes. That is a total of $20,000 in itemized deductions on the two returns. For my clients in New Jersey, it is not hard for each individual to reach the $10,000 maximum, or come close to it, even if they both own and live in one home.
If these two individuals, who both work and have their own separate income, were married, the itemized deduction would still be limited to $10,000. Filing separately would not make any difference, as the limitation is $5,000 for married taxpayers filing separate returns.
So, by having joined together in holy matrimony this dual-income couple will probably be paying tax on $10,000 more in net taxable income, which would result in over $2,000 in additional federal income tax.
The act repeals all miscellaneous itemized deductions subject to the 2 percent of adjusted gross income exclusion. This includes unreimbursed employee business expenses. However, it keeps the above-the-line adjustment to income for educator expenses, which is a deduction for unreimbursed business expenses. While teachers obviously perform a vital service to the community and the country, Congress apparently believes they are more important than other municipal public service employees, like police officers, firefighters and emergency medical technicians, who also incur out-of-pocket expenses in the performance of their equally important jobs.
And the repealed miscellaneous deductions also include investment expenses. But the act keeps the itemized deduction for investment interest, obviously an investment expense. This deduction is still limited to net investment income. The new tax law will actually increase the deduction for investment interest in many cases, as deductible investment expenses are no longer a factor in determining net investment income.
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.