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Breaking Down the Trump Tax Plan

A brief glance at the headlines about President Trump’s newly unveiled tax plan is likely to leave the average American more confused than they were before they researched it. With right-leaning news sites like The Christian Science Monitor proclaiming "Trump’s Tax Plan: Why Many Middle Class Republicans Support It" and the left-leaning Washington Post asserting "Trump’s Tax Plan Is Still Even Less Popular Than Trump," it's hard to know what to believe about the new tax plan. Based on the headlines, it falls somewhere between abject poverty and $100 bills raining from the sky.

So, what’s the truth behind the plan? What does it mean for the average American, and the average Texan? What will it mean for your small business? Here’s a closer look.

Who Benefits From the New Plan?

You may have heard that the wealthiest Americans will benefit the most from the new tax plan. This is because the top individual tax bracket is dropping from where it currently sits at 39.6 percent down to 37 percent. For a person making $10 million a year, this translates to a savings of $361,435. Of course, most of us don’t make anywhere near that each year. In fact, according to "The Motley Fool," in 2015, the average adjusted household income in America was just $67, 565. Here in Texas, that number sits at a much lower $55,200.

So, what does the tax plan mean for the average-earning, middle-class Texas family?

The first and most noticeable change will be to the tax bracket. Most - but not all - Americans will see their tax bracket decrease, but it will depend on your individual circumstances whether this translates into any real savings.

Another important change is that there are no longer personal exemptions. The good news is that your standard deduction will decrease as well, but if you are one of the 30 percent of Americans who itemize their deductions, the new tax plan could complicate your filing. This is because for starters, the combined state and local deduction can no longer exceed $10,000.

Furthermore, for taxpayers with unreimbursed medical expenses, the percentage you can deduct has decreased from 10 percent to 7.5 percent of your gross annual income. So, for example, if you make $100,000 a year and your unreimbursed medical bills exceed $10,000, you can now only deduct $7,500 from your gross income instead of $10,000. This change is retroactive, too – so it essentially goes into effect this tax season, not next tax season.

For those who deduct their mortgage interest and real estate taxes, big changes are coming there, too. Under Trump’s plan, real estate taxes are now included in the $10,00 state and local deduction maximum, and while you can still deduct mortgage taxes for now, there are some important changes there, too.

As the new law states, for mortgages taken out after December 14, 2017, you can now only deduct interest on the first $750,000 of any mortgage debt. For most Texans and most Americans, this shouldn’t be a big deal; however, in areas where housing prices are much higher, this could translate into a big loss. But it gets worse, because after 2017, interest from mortgage debt and home equity loans will no longer be deductible at all, regardless of when the loan was originated, so if you were planning on buying a house or taking out a home equity loan in 2018, none of that interest can be deducted.

A glaring omission that could hurt working families making under $100, 000 a year is the child and dependent care credit. This credit was not adjusted at all, and has not been adjusted since 2003, so in essence has technically decreased. Under Trump’s plan, The Tax Policy Center states that the majority of the child care tax savings (about 70 percent) would go to families making over $100,000 annually. Furthermore, only 1 percent of the tax savings would go to the lowest-earning 1 percent of Americans, the very people who could use a child care credit most.

And if you’re one of the 54 percent of state and local workers and 36 percent of private workers with access to a dependent care flexible spending account, or DCFSA, consider that access revoked, as Trump’s tax plan has outright abolished the DCFSA program, which allowed families to set aside up to $6,000 pre-tax dollars for child care and elder care expenses.

Other deductions that will be outright eliminated under Trump’s plan are the casualty and theft losses credit, which benefits those who have lost valuables in natural disasters and theft; HSA deductions; teachers' expenses; student loan interest; alimony payments; self-employed health insurance; employee business expenses; and gambling losses.

While a lot of this may still seem good now, Business Insider’s Bob Bryan estimates that about 8.5 million Americans will see an immediate tax increase, and another 4.6 million Americans will see one by 2025. Analysts at Business Insider believe many Americans will experience a short-term bump in income, but it will not be a significant increase for most workers.

As for corporations, they will see their taxes slashed from 35 percent to 21 percent, and they will now be allowed to deduct state and local taxes. The new plan will also double estate tax exemptions, and allow smaller businesses to deduct the cost of depreciable assets annually instead of amortizing them over several years as is currently done. For independent contractors who register as a "pass through entity," they can expect to pay a 20 percent tax rate across the board.

While it is not yet known just how big an impact the new tax laws will have on the average family, what is clear is that Republicans are hoping these modest boosts in income will mean a big boost in the polls this November - well before you feel the pinch on your 2018 tax returns.

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Wednesday, 19 September 2018

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