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Just two weeks ago we hosted my parents, siblings, their spouses, and their children for Thanksgiving. We didn’t talk much about the Tax Cuts and Jobs Act (our 15 mouths were too full of food). Maybe we should have.
We may soon be living in a new tax world, and with all the changes in the House and Senate versions of the TCJA it is hard to know what it all means. We can learn some basics about the tax code, and use a handy interactive tool developed by The New York Times to get a rough idea of how our tax bills might change. We can also review TPC’s analysis of the bills.
But in the end, this tax overhaul will affect individual households in very different ways, as my colleague Howard Gleckman explains. Take, for example, some key provisions that affect the households that comprise my extended family.
My parents. Lower corporate tax rates should increase the value of their investments. In addition, my father owns a limited liability corporation, and the House and Senate versions of the TCJA would reduce tax rates on some pass-through entities. But the rules are different in each bill and it remains to be seen whether, or even if, he’ll pay lower taxes on income from his LLC. Mostly, my parents are worried about what the $1.5 trillion cost of these tax cuts would mean for the federal deficit and ultimately, for the future of programs like Medicare and Social Security.
My sister and brother-in-law. They own a house and give to charity so, like about one-third of households, they itemize their deductions for state and local taxes, mortgage interest, and their gifts to non-profits. Both bills would end their deduction for state and local income taxes but keep it for property taxes up to $10,000. They could still deduct mortgage interest and charitable gifts, but because the bills also increase the standard deduction for couples to about $24,000, it may no longer be worth it for them to itemize.
My adult nephews. Both are in college and neither earns enough right now to pay federal income taxes. But once they go to work and start paying taxes, the House bill would bar them from deducting the interest on their student loans. They’ll lose their personal exemptions, too. But a $6,000 bump in the standard deduction for singles likely would more than make up for losing that above-the-line deduction.
My brother and sister-in-law. They have three children under age 10, one of whom has special needs. They would be able to claim the more generous $24,000 standard deduction and would get a credit of up to $1,600 for each child in the House bill or $2,000 in the Senate bill. If they don’t owe enough in taxes to offset the full credit, the House and Senate did propose a refundable CTC of up to $1,100 in 2018. But they’d also lose personal exemptions, which for a married couple with three kids, are worth $20,250 this year. My sister-in-law also faces a steep tax increase: She is a graduate student who has thousands of dollars in tuition waived in return for her work as an instructor (she teaches tax to social work students, if you can believe it). The House bill would treat her waived tuition as taxable compensation.
My niece. My brother’s oldest daughter has Down syndrome and receives Medicaid. My niece also qualifies for the Achieving a Better Life Experience (ABLE) program that allows relatives to create tax-advantaged accounts to assist young people with disabilities. Both bills would expand that program. However, in any given year she could face additional medical costs—such as a surgery not fully covered Medicaid. Under current law, if their employer-sponsored insurance situation changes, my brother and his wife could deduct out-of-pocket medical expenses that exceed 10 percent of their adjusted gross income. The House bill would repeal the medical expense deduction while the Senate bill would make it more generous—but only for one year.
My husband and me. Despite the big increase in the standard deduction and the loss of our deduction for Michigan income tax and some of our property taxes, we’d still itemize. My husband works for a multinational corporation that should do very well under the corporate and international tax provisions of either bill. As an independent contractor, my pass-through income may benefit from lower rates, though like my dad, I’ll have to watch to see what the final rules look like. We’d lose our personal exemptions, but would be able to claim some portion of the proposed expanded child tax credit—an amount that would decline as income rises.
Our children. By the time my children are earning income, they could be taxed under an entirely different regime. Almost all of the Senate’s individual income tax changes expire after 2025. But all else equal, they’ll pay higher taxes, because both bills would use a less generous formula for indexing the tax code for inflation.
They—and my nieces and nephews—will pay more in another way: higher interest costs on greater government debt. The bills would add well over $1 trillion to federal deficits over the next ten years. Our children, and everybody else’s children, will carry that debt. They’ll feel its weight when their interest rates rise on their future mortgages and student loans.
This is a snapshot of one family gathered round a holiday table. On average, the House and Senate bills would cut taxes by an average of about $1,200 to start, with most of the benefit going to the highest-income households. Both bills let provisions expire after a few years’ time. Under the House bill, about a quarter of households would face higher taxes by 2027 than under current law. Under the Senate bill, about one half would.
But with these bills, averages are misleading, as my own extended family shows. Our four households might seem similar in a holiday snapshot. But we earn our income in different ways and our families are different sizes.
And we would all experience the TCJA in our own way.
The Tax Hound, publishing the first Wednesday of every month, helps make sense of tax policy for those outside the tax world and connects tax issues to everyday concerns. Need help or have an idea? Post a comment, or send Renu an email.
Posts and Comments are solely the opinion of the author and not that of the Tax Policy Center, Urban Institute, or Brookings Institution.
J. Scott Applewhite/AP Photo