How Would the Senate Tax Plan Impact You? - Smart Money Seed


How Would the Senate Tax Plan Impact You?

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Although the new tax plan's potential implications are often blown out of proportion by biased news reporters either trying to make it look really good or really bad, the fact of the matter is that we will all feel some sort of impact once the damn thing finally gets executed.

If you're confused about this whole process, you're not alone. Essentially the House has passed a tax reform plan, the Senate has passed a slightly different plan, and the powers that be will now hash out the differences to propose the finalized plan.

Barring anything radically bizarre, tax reform is now a when rather than an if. We're also waiting on the final what.

The Skinny

Yahoo Finance has an outstanding and simple synopsis of how the Senate plan would affect a family of 4 making $25k, $75k, and $175k. Some important notes from that article:
  • $25,000 income - estimated $100 annual tax savings (0.4%)
People are griping about this because the numbers don't suggest that the new plan does enough to help these people. The fact of the matter is that a family of 4 making $25k per year doesn't pay much in federal tax anyway. With a 12% tax bracket and a standard deduction of $24,000 in the new plan, extremely low income families will not be drowning in taxes.
  • $75,000 income - estimated $2,244 annual tax savings (2.99%)
A popular narrative is that the wealthiest people will be helped the most by the new tax plan. Yes that's true from a strict dollars perspective, but I'm sure if we conducted a poll off families making $75k, they would be elated about the extra $200/month in their pocket. The nearly 3% savings this represents actually does exceed the 1.77% savings for families earning $175k.
  • $175,000 income - estimated $3,095 annual tax savings (1.77%)
It will be interesting to see how these people end up investing this extra cash. While families with the previously discussed levels of income will most likely use the extra money to do things like make ends meet or pay down debt, families making $175k are hopefully managing their finances well enough to not have to do those things at least on a long term basis with an extra $250 per month. This is where we could see the biggest increase in economic stimulus, charitable giving, and even job creation.
  • 70.4% of taxpayers claimed the standard tax deduction
The previous standard deduction for a married couple filing jointly was $12,700 ($6,350 for singles). The average itemized deduction among those who claimed (29.6% of taxpayers) was $27,053. If the standard deduction is nearly doubled to $24,000 according to the Senate bill, the amount of taxpayers claiming the standard deduction would increase. That means most of the changes in what people can and can't deduct will only affect the wealthiest taxpayers who are making the most money and spending the most money on things that can be deducted such as charitable contributions and mortgage taxes. Most middle class families will take the standard deductions if they are not already doing so.
  • New tax breaks would expire after 2025
This seems to make perfect sense to me. This is an expensive plan for the government, and nobody completely knows if the positive economic impacts will be drastic enough to offset the decreased federal income tax revenue. Like with any major change, it's good practice to execute a pilot period and then perform a check and adjust. I'm not going to start complaining about tax savings now just because I might pay more in 10 years.
  • Corporate tax rate decreases from 35% to 20%
Trump, who has been an extremely successful business owner, has discussed how difficult it is for some companies to justify keeping jobs in the US when costs can be so much cheaper overseas. Providing a tax break for US companies while simultaneously imposing new taxes and sanctions against companies who are actively outsourcing jobs and profits could help our economy as a whole take steps toward leveling the playing field with the rest of the world. This will allow companies to create more jobs, keep their jobs stateside, and pay higher wages.

What Do You Think?

I'm definitely not a tax expert (I just started taking over the reigns of doing my own taxes from my dad last year -- and he still helped walk me through it), but I do try to play one on the internet. What do you think of the proposed plan from the Senate? Are you interpreting the potential implications differently than I am? Let me know in the comments!

1 comment:

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