What Trump's New Tax Law Means For You - Part 2
One of the most controversial portions of the new tax code deals with the continuing efforts by the Republican Party to repeal the Affordable Care Act, more commonly known as Obamacare. The GOP plan strikes a potentially fatal blow to Obamacare by eliminating the requirement that every American must either buy health insurance or pay the penalty, known as the individual mandate.
How this will affect Americans remains to be seen, but with an estimated 13 million people without insurance under the new law, health care premiums will likely increase across the board nationwide. The individual mandate was a primary driver of savings under Obamacare, reducing high-cost care of uninsured individuals which was absorbed back into the healthcare system, ultimately driving costs up for everyone already paying for insurance.
Medicare recipients should be concerned about a provision in the new law that triggers a four-percent cut, which equals about $25 billion beginning in 2018 if the legislation creates a budget deficit. These cuts would not impact Social Security or unemployment benefits.
The non-partisan Congressional Budget Office estimates these changes will create a total deficit of $1.5 trillion over the next decade. Congressional Republicans dispute the number, claiming that the cuts will stimulate economic growth (a theory Ronald Reagan coined as "trickle-down economics"). This claim is hard to take seriously since no one (including the authors of the tax bill) has been able to show precisely how this massive deficit will be absorbed.
Although the bill doesn't explicitly cut Medicare, the impact of the bill on Medicare is nearly impossible to dispute. Tying the Medicare cut to an inevitable deficit makes the cuts inevitable as well. We could call these cuts an "intended unintended consequence." Expect a debate over whether Republicans who ultimately vote for this bill are cutting Medicare to be a prominent political argument leading up to the 2018 Midterm Election.
Changes For High Income Families
If your household income is more than $500,000 per year, you may still be subject to the Alternative Minimum Tax, which is designed to prevent high-income earners from exploiting loopholes. This change creates a significant cushion for many Americans because the Alternative Minimum Tax exemption for a married couple in 2017 was $160,000. This threshold change expires in 2025, and corporations will now be exempt from paying the tax.
Parents who want to send their children to private school will see a new benefit as well. For the first time, 529 accounts can be used to pay tuition at private elementary and secondary schools. Traditionally 529 plans, also known as "qualified tuition plans," could only be used for college tuition. These accounts are popular because they provide incentives for parents to save for educational expenses for their children. This change could trigger an increase in local property taxes if public school enrollment decreases because more children attend private schools.
If you are among the tiny percentage of Americans who inherit an estate, you just hit the jackpot under the new plan. Under current law, only the first $5.6 million of your inheritance would be tax-free; the cutoff doubles to $11.2 million under the new law. This threshold change is another provision set to expire after 2025.
There is also an important provision in the new plan for people who own and operate their own business. By organizing your business as a limited liability company (LLC) instead of as a sole proprietor, you will be able to deduct twenty percent of your earnings as "pass-through" income. If you are in business for yourself or work as an independent contractor, it may make a lot of sense to consider making this change, but you should consult with an accountant or tax professional before you make any final decision.
Overall, some will be winners, and some will be losers under this law. Congress has already hinted that tax cuts to other programs like Social Security and Medicaid to will be needed to cushion the estimated $1.5 deficit this law will create, which means the collateral damage for the low-income and elderly Americans who rely on these programs could be severe. Additionally, with so many provisions set to expire after 2025, some of the more tangible benefits will likely be short-lived. As a result, it's tough to project the long-term impact on most American families.
The calculation of winners and losers gets even more complicated when we consider the potential for impact down the line, which we cannot calculate now. For example, many of the programs set for cuts as Congress seeks to address the deficit, involve federal support for programs administred by state governments. That leaves state governments with a choice between slashing support for their poorest citizens and raising state taxes to make up for the loss of money from the federal government. If they take the latter choice, many Americans could see their limited gains from the new law wiped out by increases in state and local taxes.
If you're worried about the impact on the taxes you'll file this coming April, relax. These new rules will not take effect until the 2019 tax season. Between now and then, the law and its consequences will become clear, so stay tuned for more updates!