Donald Trump raised my taxes by about $1,000, the bastard!
Three days before Christmas, President Trump signed into law the Tax Cuts and Jobs Act of 2017. The bill squeaked through the Senate with just 51 votes after Republican holdouts like Susan Collins and Bob Corker caved on their earlier demands and voted for it anyway. Merry Christmas.
There are many news articles and opinion pieces written about the bill, calling it monstrous, and it truly is. I won’t spend time recapping these articles here, but it’s worth noting the worst aspects of this legislation:
- It gives significant tax breaks for corporations and the wealthy by raising taxes on *some* upper middle class earners
- It repeals the Individual Mandate in Obamacare, which requires everyone to have health insurance. This could raise premiums
- It exempts almost everyone from the Estate Tax, allowing estates valued at up to $22 million to pass onto their heirs tax free
- It finances these cuts by adding $1.5 trillion to the deficit
The cherry on top of the Republican Tax bill is that most of those who will be impacted are Democrats. The legislation limits the deduction on state and local taxes (SALT) and property taxes to $10,000. Combined SALT and property taxes for high tax states like California, New York, or New Jersey (i.e. states with lots of Democrats) can easily exceed $10,000.
How can a bill that was intended to cut taxes for Americans end up raising some people’s taxes? To answer that it’s important to see how the tax bill works.
How it Works
The Republican Tax Bill doubles the standard deduction to $12,000 for individuals and $24,000 for couples while eliminating or limiting many deductions like SALT and property tax deductions. A deduction reduces your taxable income, which lowers your tax burden. The bill also eliminates the personal exemption, currently $4,050 per family member. The personal exemption works the same as a deduction.
The bill lowers tax brackets across the board, including reducing the top marginal tax rate from 39.6% to 37%.
For most people, this results in a tax cut but for a small but sizable minority of taxpayers located mostly in high tax (i.e. Blue states) the Republican Tax Bill raises their taxes because even though they are paying a lower rate, they are paying it on a much greater amount of taxable income.
Before the Republican Tax Bill
To illustrate this point, take a couple with one child that lives in New Jersey. They have a combined gross income of $164,000. They have a $500,000 mortgage on which they pay around $21,000 interest. Property taxes on the house would be around $13,500. State income taxes in New Jersey would be about $8,000. Taken together, before the Republican Tax Bill, this family’s taxable income would have been:
– $21,000 mortgage interest
– $12,150 personal exemption ($4,050 x 3 members of household)
– $13,500 property taxes
– $8,000 state income taxes
= $109,350 taxable income. Their federal tax burden would be about $18,800.
After the Republican Tax Bill
The Tax Bill sharply reduced SALT and property tax deductions, as well as eliminated the personal exemption.
– $21,000 mortgage interest
– $0 personal exemption
– $10,000 combined SALT/property taxes
= $133,000 taxable income. Under the new lower tax rates, they would owe $21,139.
Under the new rules they would qualify for a $2,000 tax credit so they would effectively pay $19,139, or around $300 more.
Not a huge tax increase, although it’s not a cut, as Trump promised. It’s worth noting that the fewer children you have the worse you do under this plan because of the child tax credit so the tax increase for a high-earning childless couple or single person is greater.
Finally, there’s the issue of how this impacts state and local taxes. This is a complicated issue that varies from state to state, but I know of at least one state where the Republican Tax Bill will have the effect of raising people’s state tax liability: Colorado.
Because Colorado’s income tax calculation starts with federal taxable income, and takes a flat 4.63% of that amount, the Republican Tax Bill will raise many folk’s state taxes in Colorado because it tends to raise taxable income. So for many Coloradans, it could be a wash. Given the Republicans’ rush job of passing this legislation, I’m sure there are many other unintended consequences of this bill.
Next time I will talk about the political ramifications of the Republican Tax Bill and what Democrats should do.