Some Ramifications of the New Tax Law

Congress is wrapping up its tax legislation. Here is some of what I’ve learned about it — particularly those parts that might be important to people trying to eliminate their income tax as I do, by keeping our incomes low:

  • This is expected to be costly to the U.S. Government. It is projected to lead to the government collecting $1 trillion dollars fewer in taxes over the next decade. This will likely show up as increased government debt, as the Republicans had a hard enough time doing the easy part (lowering taxes) and are unlikely to be able to muster enough courage to do the hard part (reducing spending). Republican optimists hope that by keeping this $1 trillion out of government hands and in the private sector, the economy will boom, leading to higher tax receipts after all, and so things will all balanace out in the end. People who know how to run the numbers, though, don’t seem to be taking that scenario seriously.
  • Early projections based on the House version of the legislation suggest that the number of “lucky duckies” who pay no federal income tax at all will rise somewhat.
  • The bill reduces both corporate and individual tax rates. But for a lot of people, what really controls how much they’ll pay is not their rate, but how much of their income is subject to the income tax and how much is safely deducted out of harm’s reach. In any case, the lowest of the rates (10%) remains the same as before and covers just about the same amount of taxable income, so from the point of view of a low-income tax resister like myself, nothing much has changed here.
  • Next year, the standard deduction had been scheduled to go up to $6,500, and the personal exemption to $4,150 — shielding $10,650 of a single person’s income from income tax. The new legislation eliminates the personal exemption, but boosts the standard deduction to $12,000 — thereby adding $1,350 to the amount that’s shielded in this way (people filing as married-joint, married-separate, or head-of-household also see rises to their standard deductions). Modifications to the child tax credit and credits for non-child dependents are meant to make up for the absent personal exemption for people with dependents.
  • The bill eliminates some itemized deductions, but also eliminates the limitation on how much of such deductions you can take if you’re well-off. You will also be able to take a slightly higher proportion of your Adjusted Gross Income (60%, up from 50%) as a deduction for charitable contributions, and the law will become somewhat more generous about allowing you to take a deduction for medical expenses. I haven’t looked into this very closely, but it’s possible that this holds out some hope to high-rollers that they might eliminate their federal income tax through zealously pursuing itemized deductions.
  • The bill would allow you to use tax-advantaged education savings accounts to pay for a child’s tuition at a private elementary/secondary school (in the past, these accounts could only be used for post-secondary education). This could be a useful tax shelter for people who would prefer not to inflict government-run schooling on their children.
  • It’s surprising to me just how little actual change there is from the status quo. Everybody complains about the complexity of filing their income taxes, and politicians get lots of mileage about promising to let people file on the back of a postcard and the like. But after all of the wrangling, this new bill keeps the individual Alternative Minimum Tax and doesn’t even reduce the number of tax brackets — the cheapest trick in the “simplification” bag. It even introduces a lot of new complexity by means of its new method of taxing “pass-through” income — something that may cause some new headaches (or, may we hope, offer new tax-saving opportunities) to those of us with Schedule C income from sole proprietorships, gig economy work, or small businesses.
  • I was also a little surprised to see neither the House nor Senate try to boost Health Savings Accounts. These are a more Republican-identified health care policy reform measure, and I would have thought that as they try to sabotage Obamacare that they would have put some effort into bolstering some of their own alternative ideas. No such luck. It makes me wonder if maybe Health Savings Accounts are a craze that has come and gone and that we might expect the program to atrophy at some point.