Tax Code Overhaul Details: Homebuilders, Tesla, and Those With Lots of Kids Come Out Worse

GOP leaders finally unveiled key details in their tax overhaul plan. There are some winners and losers as always the case. Two losers are the homebuilders and Tesla. Part of the mortgage write-off goes away and the bill will repeal electric car credits. Families with lots of kids may lose as well.

Income Brackets

Currently there are seven federal income tax brackets taxed at 10%, 15%, 25%, 28%, 33%, 35% and 39.6%. The House bill consolidates that to four.

12% (on the first $45,000 of taxable income for individuals; $90,000 for married couples filing jointly)

25% (starts at $45,000 for individuals; $90,000 for married couples)

35% (starts at $200,000 for individuals; $260,000 for married couples)

39.6% (starts at $500,000 for individuals; $1 million for married couples)

The is no marriage penalty under this setup. In fact, married couples come out ahead in many instances where one wage earner makes most or all of the money.

Standard Deduction

The bill raises the standard deduction for singles to $12,000 from $6,350 and it raises it for married couples filing jointly to $24,000 from $12,700.

This will dramatically lower the number of people who itemize deductions, especially when combined with reductions in mortgage interest and state income tax deductions.

Personal Exemptions Eliminated

Today you're allowed to claim a $4,050 personal exemption for yourself, your spouse and each of your dependents. The House bill eliminates that option.

Families with three or more kids may fare worse under the revised code.

New Family Credits and Expansion of Child Tax Credit

The bill creates new $300 credits for non-child dependents and it also increase the child tax credit to $1,600, up from $1,000, for any child under 17. But these credits apply only to taxes paid.

Currently people can get money back. This setup will eliminate fraud but social advocates will scream.

Dependent Flexible Medical Spending Accounts Eliminated

Some employers allowed parents the opportunity to save up to $5,000 of their income in a dependent care flexible spending account. That option is gone.

State and Local Tax Deductions Eliminated

States with high state taxes will howl but those deductions are gone. Again, this chews into the number of people who benefit from itemizing.

Mortgage Interest Deduction Reduced

The bill preserves the mortgage deduction for existing mortgages. But going forward you can only claim a deduction for interest on mortgage debt up to $500,000, down from $1 million today.

The Tax Policy Center estimates the percent of filers who claim the mortgage interest deduction would fall to 4% from 21% because of the higher standard deduction.

AMT Gone

The much despised as well a complicated Alternative Minimum Tax is gone. The idea behind AMT was to hit the richest taxpayers. In practice it hit those with incomes between $200,000 and $1,000,000. The Tax Policy Center estimates that elimination of the AMT will reduce revenue by $440 billion in the first decade.

Estate Tax Repealed in 2024

The estate tax today affects those with more than $5.5 million in assets (or $11 million if you leave a spouse behind). That about 0.2% of estates.

There will be lots of bickering over the repeal and some do not think it will survive. The house bill did not repeal the tax until 2024 but it did double the exemption levels.

Corporate Tax Rates

The New York Times notes the plan sticks to President Trump’s goal of a 20 percent corporate tax rate, down from a maximum of 35 percent today.

  • The bill will levy a global minimum tax of 10 percent, which would apply to income that high-profit subsidiaries of American companies earn anywhere in the world. The effort is aimed at preventing companies from shifting profits abroad and grabbing back some of the tax revenue on income earned overseas. Those profits are currently not taxed until they are returned to the United States, giving companies an incentive to keep that money offshore since they are taxed at the current corporate tax rate of 35 percent.
  • The bill would force companies to pay a one-time, 12 percent tax on liquid assets held overseas, like cash. The tax, which is reduced from the current 35 percent tax rate, would be payable over a period of eight years. For illiquid assets, like equipment or property, the tax rate would be 5 percent.
  • It would also force American subsidiaries of foreign-owned companies to pay a 20 percent excise tax on any payments sent back to foreign affiliates.

Pass-Through Income

Small business S-Corporation owners (I am one of those) may benefit from pass-through tax proposals. The New York Times reports:

  • Republicans stuck to their promise of lowering the tax rate for “pass through” businesses to 25 percent. But to prevent the rate from becoming a loophole for all sorts of individuals, tax-writers have created a formula they say will ensure that business owners will pay a higher individual tax rate on income that they receive as wages. The formula would be applied based on the circumstances of the business.
  • That provision is not enough to satisfy the National Federation of Independent Business, which said in a statement it is “unable to support the House tax reform plan in its current form.”

The lowering of the pass-through rate to 25% may benefit those making more individuals making more than $200,000 or families $260,000. Those are the amounts at which the 35% tax bracket kicks in. Details of how this all works are not available.

As it stands, I will not benefit much, if at all from the legislation, because of the lowering of the overall tax rates.

Not the Final Product

This is not the final product. Lobbying will be intense. Nonetheless, I expect something along these lines will become law.

The bill is a step in the right direction, but it could be much simpler yet.

Mike "Mish" Shedlock

According to career builder, 78% of Americans are living paycheck to paycheck (or going deeper into debt). The same survey says 10% of Americans making $100K or more also can't make ends meet -- as public schools have failed and private schools cost way too much.

Most Americans live paycheck to paycheck

But Congress wants to pretend everything is fine, and government can keep getting bigger and bigger -- and the tax base smaller and smaller? Trump just appointed a former investment banker to the Fed, hoping he can help peddle more and more federal debt onto people who can't afford to pay their bills, much less lend to uncle sam. Powell might be a good bond salesman, but as the Japanese already proved -- you can't sell debt to people who have no savings.

Obamacare will have to get repealed to save small businesses (and all taxpayers indirectly). Until Congress wakes up and accepts this simple truth, nothing else really matters

Truthseeker, I have no idea why you think I am mad at you. You asked an interesting question on Bitcoin. The answer is lengthy. I will address in a post. But I have comments on bitcoin bubble first.

Eliminating the state and local tax deduction could result in more taxes paid than income earned. This could happen to a retiree who has a pension or SocSec but lives in an area with high property taxes. If one is making even $100K, pays state / local taxes, and mortgage interest. the $12000 proposed threshold is easy to surpass. Under the new plan those state and local taxes deduction would be only partially offset by a higher standard deduction. Any taxes not fully offset would result in taxing taxes. There is no fairness to people in those situations.

The 'elimination of the AMT' is very misleading. What the AMT does is limit miscellaneous & SALT deductions for people with (modestly) high incomes. This proposal doesn't really eliminate the AMT, it (effectively) makes the AMT the ACTUAL tax law.

There are - by my count - 32 Republican in the House from NY, NJ, California and Illinois. Some of them may be in very safe seats, but I can't imagine many of them voting for a tax bill that caps the SALT deductions.

Mish once again I agree with most of all the serious points Medex Man has made here. One of the biggest mistakes Trump made was when he questioned the heroics of ex prisoner of war John McCain, so that twice McCain has taken his revenge to deny Trump the move to change Obamacare. That's where you have to start or nothing else really works so as it is it's DOArrival as he says imo. I'm not that sure where to cut but there are a lot of places we need to cut wealthy peoples means tested benefits like social security which is done already. Years ago I told my Uncle that considering his wealth, after he received the amount he had paid in So. Sec. taxes plus inflation, he should be taken off this benefit completely. Oh how he raised hell-let's just say he didn't agree. Also tax increases-sorry revenue enhancement, would be things like porn and pot-lets tax them the same way or even more than we do sin taxes on liquor and tobacco. Our country is in real trouble. These addictions to drugs and pornography, corruption, weak leadership and the total loss of traditional values and the rule of law are taken their toll on our culture. We used to be able to depend on our spiritual leaders, but nowadays these men in their multimillion dollar homes and fleet of jets, portray an incredible lack of humility, where I see arrogance and hypocrisy!

If you are in the 39.5% tax bracket and pay alimony, there is very bad news for you. Your alimony costs effectively just increased 65%! Alimony would no longer be deductible under this plan! That is both shocking & immoral. (SEC. 1309. REPEAL OF DEDUCTION FOR ALIMONY PAYMENTS.)

@truthseeker -- I have no interest in taxing social security (its a ponzi scheme and will collapse anyway). I don't want to tax porn or liquor or tobacco or anything else. Washington DC has PLENTY of resources, and doesn't need another penny.

I want to right-size government. Fire at least half the bureaucrats in Washington; most people in the private sector endured worse... and please don't insult everyone's intelligence with some bogus rubbish that government "needs" this headcount. Even if half the usless jobs were eliminated, government "productivity" still wouldn't match even a poorly run private company. There is no excuse for this corruption, waste and fraud.

People in porn work hard. No I haven't been on set of one of their "movies", but compared to government dolts, the porn people deserve the money more than the corrupt losers in government.

Enough with taxes. Stop trying to bait and switch with this "rich" versus "poor" garbage. That isn't the problem. Start telling it like it is: "private sector" against the "public sector". Eliminate half the headcount and eliminate the lucrative pension scams for the remaining half. Make them fund their own 401(k) like the people they work for. NO SPECIAL TREATMENT for government employees -- none. Make Congress pay Obamacare prices retroactively -- their staff too.

If Trump wants to draw a line between himself and the Democrats this won't do it. Sure the vote may fall on partisan lines, but the two parties can effect a compromise because tax reduction is a bipartisan issue since we figured how to tax people using monetary policy. This is political theatre, and not very good theatre at that.

With respect to the marriage penalty/shacking up subsidy, that $200,000/$260,000 instead of $200,000/$400,000 bracket appears to create a localized penalty for folks who are married (not my problem, thanks.) Perhaps I am wrong.

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