Why is the new proposed tax bill be bad for lower and middle income people?

I am very ignorant of tax matters. I just go to H&R Block and they handle everything. Can someone explain to me why the new bill would be bad lower and middle income people? Will a middle income person like me no longer get a tax refund? Will I end up owing instead? Anyway, I keep hearing the cons about the bill. Are there any pros to it?

Any comments would be appreciated!

Thanks! :smile:

 

P.S. Hopefully, nosborne will see this and weigh in since he is a tax expert.

 

"Expert"? You flatter me abominably. Also, unfortunately, inaccurately. I don't do tax, alas, having gotten my ample posterior on the State Bench. But from what I know, most middle and working class taxpayers will indeed see a tax cut IF they paid income tax in the first place, that is. But the cut expires in ten years and the CBO thinks it will add over a trillion dollars to the national debt.

Things I like: elimination of many itemized deductions in exchange for doubling the standard deduction. This didn't go far enough but it will reduce the extent to which renters subsidize homeowners, taxpayers in low tax states subsidize taxpayers in high tax states, and we all subsidize charitable donors. I also liked that an attempt was made to reduce the corporate tax.

Things I don't like. Obamacare mandate repeal, estate tax reduction (but they decided not to phase it out so that's good) and the failure to end the exclusion of gain from sale of a residence.

So the answer as I see it is that whether lower income folks will benefit depends on individual circumstances. Two final points...this thing is a tax cut not a tax overhaul. Ignore the hype. Like the 1986 "Code", it's not noticeably different in structure from the 1954 Code that gave us our current system. Second, it's not the end of the world. Irresponsible? Probably. Unpopular? Oh, yeah. But completely bonkers it's not.

My two cents.

 

Thanks for your unbiased opinion Nosrborne, I appreciate it. I hear the Dems scream bloody murder, and the Reps claim it is the best thing since apple pie. I don't know which side to believe. I figure the truth must be somewhere in the middle. I like that you said "It's not the end of the world". It makes me feel better.

Hopefully, others will chime in since I am interested in hearing opinions of both the good and the bad in an unbiased matter.

 

That's what's being said but I question it. People in high tax states usually have higher salaries and so pay more in income tax. Higher salaries to compensate for a higher cost of living.

 

Thanks, I didn't realize that the cut expires in 10 years, while others will remain permanently. In my ignorant tax mind, that doesn't seem fair in the long run. On another note, I will probably take a ding in my taxes this year since I received a large amount of money in a lump sum.

I just want to pay my fair share of taxes and be left alone.

I hope others will weigh in on this as well. I am trying to look at this from both sides in an impartial manner so I can better understand it.

 

A little more discussion...one of the best features of the new law for ordinary taxpayers is the doubling of the standard deduction. That's where most people will see their taxes go down and far and away most wage earners do not itemize. Even many of those (like me) who have itemized in the past will find that either the deductions they used to take are now more severely limited or completely unavailable or that their itemized deductions are no longer greater than the standard deduction.

One particular place this will matter a lot I think is in charitable giving. There won't be the tax motive to give to colleges, churches, and the like. I don't know whether people will give less but I am pleased that people will no longer subsidizing someone else's donations to organizations they don't necessarily like.

Another significant result will be the serious reduction of the tax advantage in buying a modest home as opposed to renting it. More expensive homes requiring larger mortgages will still carry a tax advantage (which inures to the benefit of those who can afford more expensive homes) but the majority of renting Americans will now pay no more in taxes than their similarly situated home buying Americans because both groups will probably claim the standard deduction. I'd like to have seen a complete abolition of the mortgage interest deduction but it does have a cap of $1 million in mortgage principal so it's a decent compromise.

My disagreements with the Gadfly are largely matters of tax policy and there are at least two legitimate sides to each of those questions. Well, and he seems to agree that I'm no expert! (wink)

 

One last philosophical point: A tax deduction or exclusion is EXACTLY THE SAME THING as the U.S. Treasury writing the taxpayer a check. It doesn't feel the same which is why Congress prefers deductions and exclusions but next time someone says that the Housing Industry (or whoever) needs the mortgage interest deduction to help people buy homes and sustain employment and all that, just consider the effect writing that virtual check has on housing prices (or whatever). Inevitably, prices go up.

 

I'd like to say something about decimon's comment, too...state and local income tax has been deductible from gross income for figuring federal income tax for decades. The effect is that the U.S. Treasury subsidizes citizens of those states with high income taxes at the expense of citizens of states with low or no state income tax. Again, it's exactly the same as writing a Treasury check to the taxpayer to reimburse him for a portion of his state tax liability. Some years ago Congress allowed a limited deduction for sales taxes instead of state income taxes to partially redress this disparate treatment. Now, however, every federal taxpayer can deduct up to $10,000 for any state or local taxes paid. I think a cleaner approach would be to have eliminated the deduction altogether and reflect the change in a higher standard deduction but politics is the art of the possible and at least now everyone is treated the same.

 

Oops, my mistake. The mortgage interest deduction principal amount is $750,000 not $1 million.

 

Hmm, I like how you explain things. I am starting to understand things a little better now. For example, I was worried that my homeowners tax write off deduction (I am not sure if that is the proper term) would be lost. But in reading your comments, it seems as if I will still benefit from the new cuts I guess.

Hopefully this discussion will continue. My aim is not to start a flame war. At least now I know a few basics so when I go see my tax guy Mike next year, I can ask him some questions to clear up my confusion.

Actually, in passing, I just though of a question for you or anyone else cares to answer. I have heard that because of this new tax plan, millions of people will get thrown off of the ACA. Is that true? And if so, why? What is going to happen to those people?

Thanks, the more I learn, the more questions I seem to have. I am trying to decipher what is fact or fiction.

 

The U.S. Treasury has no money other than that taken from the taxpayer.

 

Yes, but not necessarily taken from THAT taxpayer.

 

What I mean is, one taxpayer ends up paying more tax on the same gross income than another taxpayer because only the latter can take advantage of a deduction. The Code effectively takes money from one and gives it to the other.

 

Low tax states are not subsidizing high tax states. The states that are being subsidized tend to have high rates of poverty, but there are other factors.

https://taxfoundation.org/states-rely-most-federal-aid/

https://www.theatlantic.com/business/archive/2014/05/which-states-are-givers-and-which-are-takers/361668/

That's the lie Paul Ryan told. He said the state tax deductions lead to the high tax states paying less in federal taxes. The truth is that several high tax states are subsidizing poor, low tax states. Therefore, they can keep their taxes artificially low, and the wealthier, high tax states have to tax their own people more for local services because so much of their money is being lost to the federal government.

 

Due to business tax.

 

Well, looks like the bill is headed to the White House so for good or ill, the changes will be made. I wonder what political effect it will have. The bill is intensely unpopular and seen as running up the debt to give money to rich people. The Democrats will flog that perception from now through the 2018 elections. What will the GOP say in reply?

 

GOP borrows "Obamacare" to defend tax bill

FYI,

GOP borrows 'Obamacare' playbook to defend tax bill - CNNPolitics