The recently unveiled House tax cut plan may help the “average” Arkansan, but the state’s small business owners and those with capital gains from a recently sold business will likely have a higher tax bill, according to analysis by two accountants for Talk Business & Politics.
CPAs Robert “Bo” Frazier of Little Rock and David Potts of Fort Smith looked at 10 cases from real – but unnamed – clients based on 2016 tax filings. With each case they compared the 2016 results with how the proposed plan from the U.S. House would change the filing. Potts reviewed the filings of two small business owners, and Frazier looked at a variety of cases, including a family that sold a business and is carrying long-term capital gains.
The 429-page Tax Cuts and Jobs Act presented Thursday (Nov. 2) by House Republicans had several touted goals: to simplify the tax code, reduce the number of tax brackets, reduce the corporate income tax rate and eliminate hundreds of itemized deductions.
“The Tax Cut and Jobs Act is about, you guessed it, tax cuts and jobs. As you probably know already, under our plan, the typical American household will see a $1,182 tax cut,” noted a statement from the office of House Speaker Paul Ryan, a Republican from Wisconsin. “And now, a new report from the nonpartisan Tax Foundation estimates that our reforms will create nearly one million full-time jobs and raise after-tax incomes for middle-class families by $2,598 over a decade. This follows an analysis from yesterday (Nov. 1) that forecasts 3.9 percent GDP growth and 3.1 percent higher wages as a result of our bill.”
The House measure is different from changes proposed in the U.S. Senate, and is already resulting in opposition from powerful lobbying groups. For those two reasons, the House plan faces a tough challenge, and if it does progress will likely see many amendments.
Following are some of the measures in the proposed bill.
• Reduction of the federal corporate tax rate to 20% from its top rate of 35%.
• Repeal of the estate tax, which is a 40% tax on estates exceeding $5.49 million for individuals and just under $11 million for married filers. The repeal would take place in 2024.
• Reduce the number of tax brackets from seven to four. The seven tax brackets are: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. The four brackets in the House bill would be 12%, 25%, 35%, and 39.6%.
• The bill seeks to raise the standard deduction to $24,400 for married couples who file jointly and $12,200 for single filers. The deduction is now $12,700 for married couples and $6,350 for individuals.
• For families, the bill would eliminate $4,050 for each qualifying dependent. The bill would instead raise the child tax credit to $1,600 from $1,000, and create a $300 credit for each parent and non-child dependent. However, the $300 credit expires by the end of 2022.
• Other deductions eliminated include those for medical expenses, student loan interest, moving expenses, alimony, and casualty losses from theft or catastrophe.
• It would be legal to contribute to a 529 Education Saving Plan on behalf of an unborn child.
The Brookings Institute noted other changes in its blog.
“Churches would be allowed to make political statements. Tax credits for adoption and for disabled and retired people would be eliminated. … Many of the new provisions would not be indexed for inflation, and the way other tax provisions are indexed for inflation would change. These, and many other provisions, will be scrutinized heavily over the coming days and weeks to determine their ultimate impact and whether there might be unintended consequences,” Brookings noted.
CAPITAL GAINS, MEDICAL EXPENSE EXAMPLES
In his analysis, Frazier outlined other deductions that aren’t getting as much press.
“For example, current law allows you to offset gambling gains with losses; those losses show up as itemized deductions, but those appear to be going away. And unreimbursed employee business expenses, like use of your car where the employer doesn’t reimburse you. That is an itemized deduction and appears to be going away. Investment fees paid to brokers; gone. CPA fees-gone,” he wrote.
In Frazier’s eight cases, two would see savings under the new House plan. A married couple with no kids with adjusted gross income (AGI) of $106,300 would save $1,048 thanks in large part to the proposed $24,000 standard deduction. An individual with AGI of $380,108 would see a tax bill reduction of $10,010.
A married couple with no kids and an AGI of $1.344 million would see their tax bill rise by $98,911. Much of the rise is from the loss of state and local tax deductions.
A married couple with no kids with AGI of $1.146 million would get hit hard, seeing their tax bill rise by $161,880. The couple recently sold their business and would lose existing favorable capital tax rates on $1.1 million in capital gains.
A married couple with two kids and AGI of $405,521 would see a slight tax bill increase of $590. A married couple with two kids and AGI of $1.325 million would owe an extra $15,790 under the proposed new law. The increase results primarily from a loss of more than $115,000 in itemized deductions.
A married couple with four kids and AGI of $83,782 would see no change in their tax bill, whereas a married couple with three kids and AGI of $219,942 would see a tax bill increase of $4,127. Part of the reason their tax bill would rise is from the loss of $52,519 in itemized deductions.
Frazier also reviewed the case of an elderly adult living in a nursing home with a 24-hour caregiver. The AGI of this person is $462,043 with an annual medical bill of $300,000. However, because of the loss of medical deductions, the tax bill of this elderly person would rise to $115,615. Under existing law the person would pay no tax.
SMALL BUSINESS CHANGES
The first small business owners reviewed by Potts was a married couple with no children and AGI of $133,947. Their tax bill would increase by $9,314 thanks in part to an almost $15,000 self-employment tax required under the proposed new law.
The second small business owners were also a married couple with no children and AGI of $1.317 million. Their tax bill would increase by $76,023 under the new law, with the gain coming from the loss of deductions and the self-employment tax.
“There is the possibility of some calculation error, but overall, the two cases above are accurate illustrations of how the small business owners won’t benefit as well as the Trump organization,” Potts noted in his analysis.
The National Federation of Independent Business, one of the influential national lobbying groups opposing the House plan, said the bill “leaves too many small businesses behind.”
LOWER INCOME ARKANSANS
Research from the Institute on Taxation and Economic Policy shows that most Arkansans who file individually and earn between $21,000 and $90,000 will see a reduced tax bill.
Those in the $20,660 to $34,760 wage range would save an average of $330, with 73% in the category saving up to $450.
The “middle 20%,” according to ITEP, earn between $34,760 and $54,780 and would see an average tax reduction of $610, with 81% saving $760.
Earners between $54,780 and $89,080 would see their tax bill reduced an average of $950, with 86% saving $1,170.
“The effects of this tax bill on households vary a great deal, even for households in the same income group, depending on the types of income and types of expenses that different families have,” ITEP noted in its report.