President Trump signed The Job Cuts and Jobs Act on December 22, 2017. The legislation that actually passed is quite different from the promised 35 percent tax cut Trump promised on the campaign trail. In fact, the main beneficiaries of this tax law are taxpayers at the top of the heap, specifically, the top five or six percent as published by Newsweek in the article, Trump’s Broken Promise: GOP Tax Bill Fills Wealthy People’s Pockets, Takes Money from Middle Class, Poor.
Important Changes that Impact a Large Segment of Population
– Eliminates moving expenses except for military personnel
– Eliminates deduction for people paying alimony
– Almost doubles standard deduction
– Limits mortgage interest deduction to $750,000
– Eliminates home equity loan interest deductions
– Repeals Obamacare tax penalty for uninsured
– Tax Bill’s Impact on the Middle Class
Newsweek reports that middle-income earners will see taxes lowered by about 10 percent for about eight years, expiring in the year 2025. According to The Tax Policy Center, middle class taxpayers will reap about $1000 in savings. Essentially, the majority of people who reside in the middle class can count on minimal tax relief, with no net benefit from tax cuts by 2027. Additionally, Trump’s promise for a simpler tax system with fewer tax brackets never materialized in the final bill with the three tax brackets Trump said he’d deliver. The tax code still has the same seven tax brackets as it did before the new law was passed.
Financial Prospects for the Poor Under Current Tax Law
While the poor can claim a tiny tax savings, the amount pales in comparison to the benefits gained by higher earners. The taxpayers that represent the lowest income bracket will see an income increase of .3 percent, according to The Tax Policy Center. As a point of reference, Newsweek reports that the highest income earners are gaining a significant 2.9 percent increase. Considering the drastic difference in the income levels between the top echelon of Americans and the lowest earners, this 2.5 percent difference in income benefits is significant and is why so many Americans and journalists are claiming that this bill helps the wealthiest Americans with little benefit for most of the population.
Tax Law Rewards the Wealthiest Americans
The reason wealthy people are happy about Trump’s Tax Plan is because they win big favoring business owners and wealthy people by significantly lowering corporate tax rates and estate taxes. The top one percent of Americans reap the benefits of estate tax exemptions that are double what they were prior to the passage of this law. In 2026, the rate returns to what it was before the Act passed. Currently, the first $11.2 million for a single person and $27.4 million for a couple are tax exempt from estate taxes.
The corporate tax rates have been lowered from 35 percent to a figure that represents the lowest rate since 1939, 21 percent. The tax benefits awarded to businesses by this plan aren’t limited to C-Corporations. The standard deduction applicable to pass through businesses was raised to 20 percent. This includes sole proprietorships, LLCs, partnerships and S-Corps. Many small and medium-sized businesses fall in this category and are certain to benefit.
Another benefit business owners are reaping relates to writing off depreciation. Trump’s New tax bill allows businesses to take a deduction for the cost of a depreciable asset in one years instead of having to amortize it over a longer period of time. When purchasing large equipment assets, this type of asset offers huge tax benefits, sheltering income from taxation due to write offs immediately.
In spite of the $40 billion increase in the deficit that is expected from the elimination of the corporate AMT, Trump’s tax plan included this big change. The AMT imposed a 20 percent tax rate that automatically kicked in when tax credits reduced a company’s tax rate below 20 percent. The AMT guaranteed that corporations had to pay taxes, even when the number of tax breaks grew so substantial as to almost completely eliminate a company’s tax bill.
Territorial System versus Worldwide Tax System
Trump’s tax plan changed the worldwide tax system to a more lenient territorial system allowing US companies that make money overseas, the tax exemption on that money earned on foreign soil. This change is expected to specifically favor pharmaceutical and technology companies. Aligned with Trump’s campaign promise to bring foreign operating American companies back home, this change is expected to encourage entrepreneurs and business owners to bring the money “back home” to reinvest. The justification for this change is based on the idea that the worldwide tax system encourages businesses to leave their money overseas since the money could not be taxed until it came back into the country.
Tax Impact Changes Related to Dependents
Forbes reports, the Child Tax Credit was increased from $1,000 to $2000. Covered income limits were increased from $110,000 to $400,000. Elderly dependents are also considered with a $500 credit allowed under the New Tax Plan.
Medical Deductions and Changes
Nothing garners more interest in today’s volatile healthcare climate than discussions about medical expenses and healthcare costs. Forbes reports that the deduction for medical expenses actually increased for 2017 and 2018 as the result of lowering the floor to 7.5 percent of income from 10 percent of income for qualification purposes. Considering 8.8 million people benefitted from this deduction in 2015, according to Balance.com, this attractive deduction improvement is certain to be one of the few “winners” in the new tax law that can appreciated by taxpayers across the board.
After dissecting the details related to longevity and benefits that apply to all citizens, it becomes apparent that the wealthy have reason to celebrate while the middle and lower income earners will barely notice a difference, particularly as prices keep increasing and specifically, in light of higher healthcare costs predicted. As the result of Trump’s targeted attack on Obamacare, which will mean the loss of thousands of participants as the result of eliminating the requirements for uninsured Americans to join, the prices of healthcare are sure to go up, disproportionately harming poor and middle-class Americans.