On Thursday, the GOP leadership in the U.S. House of Representatives unveiled its much anticipated ‘Tax Cuts and Jobs Act’. The tax bill still needs to be debated in the Senate and will unlikely pass in its current form.
GOP lawmakers have crafted a bill that will permanently cut the corporate tax rate to 20% from 35%. S corporations, partnerships, and LLC’s will also see a benefit from a substantial tax cut. These small businesses that operate as pass throughs will be eligible for a 25% tax rate rather than having to pay as much as 39.6% at the top individual level. The other major change is that the estate tax will be repealed as of 2024. This is all great news for small business owners and the ultra-wealthy.
The tax cut in its current form will not be welcome news for everyone. The highest-earners will see their top rate unchanged at 39.6% and many of these wealthy families living in states with high property taxes will pay even higher taxes.
The number of individual income-tax brackets will be compressed from seven to four, but the tax code will still be complex enough that your accountant’s job is safe. This tax plan would do away with many popular deductions, which could increase federal taxes for those who itemize their deductions. The tax cut is not kind to new college graduates or retirees with high medical bills. The tax proposal is repealing the deduction of student-loan interest and repeals the itemized deduction for medical expenses.
It was welcome news that the government will allow us to keep the 401(k) pre-tax at $18,000. There were rumors that they wanted to drop the pre-tax benefit down to $2,500. The limit on home mortgage-interest deduction loans will be up to $500,000, down from $1,000,000, but existing loans would be grandfathered. The bill also capped the state real estate property tax to $10,000. There were rumors that this deduction was going away entirely.
I believe that middle-class families in states with low property taxes will benefit the most from the doubling of the individual standard deduction to $24,400 for married couples and $12,200 for singles. The bill also increases the child tax credit from $1,000 in 2017 to $1,600. This should appease many Trump supporters in the South and Midwest.
The questions that investors are debating is how will the government pay for the tax cut and how much will it ultimately cost? We all know that the government doesn’t have the money to pay for the tax cut and I wouldn’t be surprised if the cost will end up being much higher than what the politicians estimate. Many Democrats are claiming that the new shortfall in government revenue will eventually lead to cuts in Medicare and Medicaid, and maybe even Social Security. However, over the short-term, if this tax cut is passed, it could be very bullish for the stock market next year.
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