WINNERS & LOSERS of 2017 Tax Overhaul

 

SHAKE UP

No Congress since 1871 has managed to do Tax Overhaul with significant changes but should this Congress manage to do so there will be massive economic repercussions. 

WHAT WILL HAPPEN

At the top of it is the proposal to lower corporate tax rate from 35% to 20% bringing to the same levels as Afghanistan, Nepal and Yemen.  At the same time retaining the top individual rate for the wealthiest at 39.5%. Keep in mind the tax is imposed on Corporation net profits and six US States like Nevada, Ohio, South Dakota, Texas, Wyoming and Washington do not charge a Corporate Tax. This at the very least targets wealthy States like California, New York and New Jersey but close to 30 states (Mostly Red) are not that affected.

At the very basic level the standard tax deduction increases from $6,350 to $12,000 for individuals, and from $12,700 to $24,000 for married couples. This would mean that deduction alone may possibly finance the top rate tax to 35 percent but the real strategy here is to increase the number of taxpayers within this bracket on the standard deduction.

Estate tax exemption nearly doubles to $11.2m, up from $5.49m, and will be eliminated by 2024.  Realistically the federal estate tax is a tax on property (real estate, stock, or other assets) has largely concentrated on inheritance. Only the wealthiest estates pay the tax because it is levied only on the portion of an estate’s value that exceeds a specified exemption level — $5.49 million per person (effectively $10.98 million per married couple) in 2017. It does limit to some degree the large tax breaks that extremely wealthy households get on their wealth as it grows, which can otherwise go untaxed. However murky this seems to be the estate tax has been an important source of federal revenue for a century.

ALTERNATIVE MINIMUM TAX

Alternative Minimum Tax - A bracket to ensure the wealthy cannot avoid taxes by taking advantage of deductions - will be repealed. This is a major source of revenue for the federal, state and local governments and so major public services including roads, highways, schools, police, fire stations and even state universities may be affected. 

Corporate profits from overseas will no longer be taxed, but a minimum 10% tax will be placed on US foreign subsidiaries. This will be an incentive for US Companies to stay at home but many already have larger operations overseas. Its far costly to bring these jobs back and taxing foreign subsidiaries outside the US will be tricky and even at 10% is hardly real revenue to account for.  

Child tax credit expands from $1,000 to $1,600 per child. This will benefit most communities but also keep in mind child tax credit increases are great news for parents, who find the credit is an easy way to reduce their tax bills dollar for dollar and possibly get a refund. 

There is no change to a limit on pre-tax contributions to 401(k) retirement funds. Presently the IRS stated that for 2018 workers can contribute up to $18,500 in their 401(k) up from $18,000 for 2017. For those age 50 or older, contribution of $6,000 is permitted for a total of $24,500.

Federal deductions for state and local income and sales taxes will be eliminated. Standard deductions ensure that all taxpayers have at least some income that is not subject to federal income tax and they generally increase each year due to controlling inflation. This is a huge source of concern as the value of the dollar may fall in uncertainty and cause volatility in US and overseas markets (Remember the 2008/09 Sub-Prime Mortgage crisis).

Local property taxes can be deducted from federal income, but are capped at $10,000. This is a major source of revenue for local governments, i.e. counties and there is little or no effect as far as real-estate value is concerned and may attract different income groups but not necessarily a higher Income groups.  

WINNERS & LOSERS

Winners: Corporations and Businesses, Wealthy heirs, Most families and Single income earners. 

Losers: Wealthy homeowners in Democratic states (i.e. California, New York, New Jersey), Ivy League Universities, Manufacturers Testing Drugs for rare conditions (Innovation and Investment for a better and affordable Health care will be a source of concern.)