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GOP Tax Bill Eliminates Key Deductions, Leaves 401(k) Alone

GOP Tax Bill Eliminates Key Deductions, Leaves 401(k) Alone

Will it be enough to persuade the House Republicans from high-taxed states?

The House GOP decided to wait a day to release its tax reform bill to smooth out some disagreements. That plan was finally released Thursday and like the framework President Donald Trump’s administration released, it reduces the number of tax brackets, eliminates deductions, and reduces the corporate tax rate.

But will it be enough to persuade the House Republicans from high-taxed states to pass the bill?

For Individuals

The plan outlines five tax brackets instead of seven. The framework touted three, but I guess it didn’t stick:

Zero
12%
25%
35%
39.6% for high-income Americans

That top rate will become “the income threshold for that rate to $1 million for married couples.”

They did not release the incomes for the other brackets, though.

https://www.wsj.com/articles/republicans-stick-with-big-corporate-tax-cuts-in-house-bill-1509629510

Via The Wall Street Journal

You can still write off property taxes, but that deduction caps out at $10,000. The mortgage-interest deduction will remain, but only applies for “newly purchased homes up to $500,000.” It looks like they will do away with deductions for state and local taxes, which is likely to be problematic for representatives from high-taxed states.

Best news: Despite the threats, the 401(k) plans remain untouched.

The Child Tax Credit goes up to $1,600 from $1,000 and “creates a $300 credit for expenses related to care of parents and non-child dependents, and it preserves the child and dependent care credit and the earned income tax credit.”

The alternative minimum tax goes away, but unfortunately the Estate Tax remains in place…until 2024! From The Wall Street Journal:

The estate tax provisions also contain wrinkles. The estate-tax exemption, set for $5.6 million per person and $11.2 million per married couple, would double immediately. The tax would get repealed starting in 2024.

Even after repeal, heirs would continue to get something known as a “step-up in basis.” That means they would only owe capital-gains taxes on the difference between the sales price of an asset they inherit and the value of the asset at the previous owner’s death. Previous versions of estate-tax repeal had limited that benefit.

Corporations

The bill lowers the corporate tax code from 35% to 20%. Pass-through businesses like S corporations and partnerships will receive the 25% rate Republicans promised, but the standard will change for them. WSJ continued:

The bill starts with the presumption that 70% of that pass-through income is attributable to labor and would be taxable at higher individual income-tax rates. For some that would create a blended top tax rate of about 35%, which those businesses and their influential trade groups may argue isn’t low enough.

For professional services firms, including lawyers and financial-services professionals, the default rate would be 100% labor income, meaning they would get none of the benefit of the 25% tax rate for pass-through businesses.

The tax code for multinational companies will include changes, some of which appear to veer away from the promises of the administration and top GOP leaders:

To prevent companies from shifting profits abroad, the bill creates a new 10% tax on U.S. companies’ high-profit foreign subsidiaries, calculated on a global basis.

The plan also imposes new restrictions on foreign companies operating in the U.S. They would face a tax of up to 20% on payments they make abroad from their U.S. operations. That is designed to prevent them from loading up their U.S. operations with deductions and pushing profits to low-tax jurisdictions. Companies could lower those taxes by agreeing to have more of their operations in the U.S. tax system.

Top conservative groups lashed out at this development:

It wasn’t immediately clear what those plans would entail, but Americans for Prosperity and Freedom Partners raised the specter of a tax on imports that White House and congressional negotiators tabled months ago.

“We strongly oppose adding a new tax that would raise prices on everyday goods while disproportionally hurting the poor and middle class,” said AFP President Tim Phillips. “In addition, any such tax would be an alarming departure from the vision outlined by the Trump Administration and the Big Six in the unified framework.”

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Comments

I’ve always thought if 10% was good enough for God, 20% is far more than enough for Uncle Sam, even if he thinks he’s twice as important as God.

Surely the onus is on the high tax states to REDUCE their tax rates to start with? Why should the rest of the country be held accountable for their out of control spending?

    healthguyfsu in reply to mailman. | November 2, 2017 at 5:53 pm

    As I said in replying to the other article about this, ANY state tax collected, regardless of rate, should not be taxed again by the federal government. Allowing that practice to resume is a big government non-conservative move.

    Further, look at where the dropping tax brackets are. They aren’t in the heart of the middle class. Lower middle class and upper middle class, maybe, but the center of the middle class gets no income relief and thus faces more tax burden from loss of deductions.

    This is one big middle class middle finger…they’ve earned themselves a loss of votes from me and many like me.

      inspectorudy in reply to healthguyfsu. | November 2, 2017 at 6:42 pm

      Your policy of not taxing any state tax by the feds would cause the states to raise the state tax to 20% to 30%. Then the feds would not get any taxes to run the government. It is up to the residents of the taxing states to stop their states from stealing from them, not non-tax state citizens to bail them out.

        healthguyfsu in reply to inspectorudy. | November 2, 2017 at 11:50 pm

        That’s the dumbest thing I’ve read on here. We have this deduction now and those taxes weren’t raised. Why would it suddenly happen now?

        healthguyfsu in reply to inspectorudy. | November 2, 2017 at 11:53 pm

        I’m going to guess that you live in a state like TX or FL with no state income tax.

        You get to deduct your sales tax in that case, so this is not a deduction that applies only to the blue states you rail on about. Those who live in states with a state income tax deduct their state income tax bill instead of their sales tax.

        So you and the poster below you can drop the self-righteous act of paying “federal taxes for others”.

      The federal government collects taxes, ostensibly, to fund the workings of the federal government. The individual states do the same thing. Now, a person wishes to live in a state which taxes their income that is their choice. However, people who do not live in that state should not have to subsidize those people by paying their federal taxes for them. Seems pretty cut and dried to me.

      As to how the ew tax brackets work out, people in the current 10% bracket do not pay any taxes anyway. Their income is so low that they qualify for numerous social service benefits. the 15% tax bracket will get a little bit of a break, as the standard deduction doubles. The the 25% bracket will probably break even, or may pay a little more in taxes. The 29% bracket will also probably break pretty close to even, even with the loss of some tax exemptions. The 33% tax bracket is going to get hosed. The 35% and 38.5% brackets are mixed. Some people will pay more taxes because of lost exemptions, but some will break even by dropping into a lower tax bracket.

      IT is not going to please everyone. But, most people will either see a small tax savings or break even.

        healthguyfsu in reply to Mac45. | November 2, 2017 at 11:48 pm

        Do you two pay your own taxes or are they done for you? I think you don’t actually understand how taxes are paid and what is meant by a deduction for state and local tax. Hint: it’s a deduction not an income adjustment…big difference.

        Your replies seem to suggest you think anyone paying a high state income tax doesn’t also pay a high federal income tax. That’s about the most naive view you could have. I’m glad you posted it, though, because it removes any doubt about you not knowing what you are talking about.

    Flyover Conservative in reply to mailman. | November 2, 2017 at 6:36 pm

    As I look at this middle class families will face an Income Tax increase. Getting rid of the Personal Exemption means the increase of the standard deduction is offset if you have one child. If you itemize today loss of the Personal Exemption subjects more income to tax. If you have multiple children you’re screwed, even with these new brackets. Two-earner families even more so. Even the child tax credit is age based and income limited. I don’t know who does their math but the bill in this form will die once folks re-figure what their taxes would be.

This is total bullsh*

I will be vacating any former support of these swamp creatures that I may have had left. They’re all dead to me.

    Tom Servo in reply to healthguyfsu. | November 2, 2017 at 10:12 pm

    The main point of getting rid of the state and local deductions is to screw over New York and California. Stick it to the enemy’s base. And for those who happen to live there and who are not libs, well too bad for you. You should get out. I’m sure there were some nice people in Nagasaki and Dresden, too.

    but this is war. The faster we can suck money out of California, the better off this county will be.

If the R’s think this abortion of a bill will somehow make up for their failure to end the Obamacare disaster …

and to stem the invasion of the US by criminals and implacably hostile foreigners …

and if they think nobody will notice that “a new 10% tax on U.S. companies’ high-profit foreign subsidiaries” is just galactically stupid …

I predict they will be disappointed.

Subotai Bahadur | November 2, 2017 at 7:08 pm

SHOW, Dog and Pony, one each. Just as the GOPe guaranteed that Obamacare survived, and is trying to keep the borders open, the nation in danger, and every foreign national being considered more valuable than any American; they will see that the tax code will either stay the same or that taxes will go up.

And they will demand that we re-elect them to fix the “do nothing Republican Congress”. That last is a quote from a GOPe candidate for my Congressman’s seat. Said Congressman being, by the was part of the “do nothing”.

Moving the deck chairs around while spending like drunken sailors.

Uniparty.

This seems pretty rational to me, if we aren’t going to really “reform” taxes…

http://freebeacon.com/politics/cotton-repeal-individual-mandate-part-tax-reform/

This is just the first cut. Then it has to go to the Senate and then through reconciliation. Want to be the final tax bill won’t look anything like this one.

Cut off your nose to spite your face…great plan. This hurts ANYONE who pays a state income tax. Hint: there are a lot of states with income taxes not abbreviated NY and CA and many of them are red.

    That greatly depends on the facts. If you’re making $40k in a 5% tax state that’s $2k, far less than the $6k of the current standard deduction. I would say there are a heck of a lot of people in similar circumstances.

      healthguyfsu in reply to randian. | November 3, 2017 at 9:56 am

      Yes, if you fall below the standard then you might not feel it, but most homeowners are itemizers, particularly young homeowners who have more to pay in interest and crappy mandated mortgage insurance. Thus, it hurts a good chunk of the young middle class and punishes homeowners in that instance, again even in the red states.

For many people the loss of the personal exemption will offset in all or part any benefit from the new brackets.

buckeyeminuteman | November 3, 2017 at 8:59 am

As ridiculous as the SALT deduction has always been, it is not a hill to die on now. The only viable option is oh so clear…STOP THE RUNAWAY SPENDING!

    healthguyfsu in reply to buckeyeminuteman. | November 3, 2017 at 9:57 am

    Please explain why it’s ridiculous not to be taxed twice on the same money that you’ve already paid in tax?

    We went to war over less egregious tax policies in the revolution.

      buckeyeminuteman in reply to healthguyfsu. | November 3, 2017 at 12:58 pm

      If it’s going to make or break this bill passing, then live to fight another day. It’s actually backwards. After you pay fed taxes, that amount should be deducted and then states tax on the net/remainder.

I think the reason that they left 401Ks alone is messing with them would have exposed the dirty little secret of the tax deferrals in 401Ks.

If you invested on your own in the same mutual funds or stock that you invest in 401Ks, the increase would be taxes at the lower capital gains rate. When you cash out a 401K or IRA or other retirement plan, you pay taxes at the higher salary rate.

It would be interesting to see the impact upon the high-tax States.
You could assume a competition for wage-earners would immediately ensue.

Or, possibly… States might consider lower taxes in order to preserve their tax base. ( Which might be considering relocation… )

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