Paying less in Federal income tax means you get to keep more of your hard-earned income for yourself, for your family and to share with others. You benefit, your family benefits and the economy as a whole benefits.
At least, that’s the way it’s supposed to work.
The new tax proposal is being pitched as a “tax cut for the middle class”. As with every tax overhaul there are winners and losers, but taxpayers need to be careful what they wish for.
Taxes for some working class families, large corporations and ultra-high net worth families will go down under the new proposal. However, it’s likely that many so-called “middle class” families, especially those that itemized their tax deductions and live in states like Minnesota that tax their income, will actually pay MORE tax under the new tax plan.
First, the standard deduction increases, but personal exemptions are eliminated. For a married couple, the standard deduction doubles from $12,000 to $24,000. However, the $4,050 personal exemption that applies to yourself, your spouse and every dependent in your household is eliminated.
So, if family of four takes the standard deduction rather than itemizing their tax deductions, their taxable income actually goes UP by about $4,000. True, the standard deduction rises by $12,000, but they lose $16,200 in personal exemptions ($4,050 x 4) – a net increase in their taxable income of over $4,000. Assuming a 25% federal income tax bracket, that’s a tax increase of $1,000.
For a family of four that itemizes their tax deductions, the doubling of the standard deduction is meaningless. Since they itemize, the standard deduction doesn’t apply to them. Their taxable income in the example above increases by $16,200 due to the loss of the personal exemption.
Second, the deduction for state income taxes – also eliminated. True, the Alternative Minimum Tax (AMT) may be eliminated in the new tax proposal and that’s probably a good thing. However, state income taxes are a major AMT item. The loss of the state income tax deduction for residents of high tax states like Minnesota will likely outweigh any benefit taxpayers receive from the repeal of the AMT.
If, like most people, you are not impacted by the AMT (or repeal thereof), your taxes are going up as well. The loss of the state income tax deduction affects everyone who pays income tax to their state of residence regardless of whether they are affected by the AMT.
Living in high tax states like MN gets more expensive under the new tax proposal.
One more thing…
I have never been a fan of the Affordable Care Act. Under this law, my health insurance premiums and deductible amounts have doubled, while my network and the quality of my insurance coverage has declined.
If you are self-employed, work for a small employer or buy your own health insurance, you know what I am talking about.
The new tax proposals promise to repeal the mandate requiring everyone to purchase health insurance. It’s a legitimate debate as to whether the government has the right to force people to buy health insurance, but if this mandate is repealed healthy people who don’t wish to buy health insurance will drop out of the market, leaving a smaller pool of “insureds” to pay the bills.
It’s been estimated that health insurance premiums may rise an average of $2,000 per family if the repeal goes through as part of the new tax law changes.
Click here to learn more about how a repeal of the ACA individual mandate might affect you.
True tax reform is needed. The tax rate on American corporations should be more competitive with other countries around the world. The Alternative Minimum Tax needs to go away. Healthcare in America should be available and affordable for everyone.
On this, I think we can agree. How we get there and who pays for it is another matter.