Tax Reform – Is It A Middle Class Tax Cut?

Tax Reform – Is It A Middle Class Tax Cut?

The term “Middle Class” is thrown around a lot by politicians. If you ask a politician what their definition of middle class, I’m sure you would get a lot of different answers.

Because of cost of living, the definition of middle class varies depending on where you live.

In order to find the middle class, you must find the household income in the middle. According to recent government data,  the household in the middle earns $59,039.

Now question is, what is the bottom and top of the range. Most people will agree living at the poverty rate is not the middle class. I will use the poverty rate as a starting point for the lower limit. According to recent government data for a household of four, that amount is $24,259.  Most experts have the lower number around $30,000.

Most experts use geographic location and household size the upper limit determination. There is nothing in the current legislation that takes household size or geographical location into consideration in order to determine a tax rate on income. The only tax provision that allowed for that was the personal exemption and that is being repealed. So as a general rule, the larger the household the more tax will be paid compared to current law.

I believe it makes sense to use the phase-out thresholds in the tax reform law in order to determine where the politicians believe the middle class ends. The best example I could find is the exclusion from income for child adoption expenses which is completely phase out at $243,540. Politicians have determined that to be the level no longer ordinary or middle class.
Here’s a look at some of the most significant changes. They generally apply to tax years beginning after December 31, 2017, except where noted. You decide, is it a tax cut for the middle class?
 Business Provisions
Replacement of graduated corporate tax rates ranging from 15% to 35% with a flat corporate rate of 21%
  • Repeal of the 20% corporate alternative minimum tax (AMT)
  • New 20% qualified business income deduction for owners of pass-through entities (such as partnerships, limited liability companies and S corporations) and sole proprietorships — through 2025
  • Doubling of bonus depreciation to 100% and expansion of qualified assets to include used assets — effective for assets acquired and placed in service after September 27, 2017, and before January 1, 2023
  • Doubling of the Section 179 expensing limit to $1 million and an increase of the expensing phaseout threshold to $2.5 million
  • Other enhancements to depreciation-related deductions
  • New disallowance of deductions for net interest expense in excess of 30% of the business’s adjusted taxable income (exceptions apply)
  • New limits on net operating loss (NOL) deductions
  • Elimination of the Section 199 deduction, also commonly referred to as the domestic production activities deduction or manufacturers’ deduction — effective for tax years beginning after December 31, 2017, for noncorporate taxpayers and for tax years beginning after December 31, 2018, for C corporation taxpayers
  • New rule limiting like-kind exchanges to real property that is not held primarily for sale
  • New tax credit for employer-paid family and medical leave — through 2019
  • New limitations on excessive employee compensation
  • New limitations on deductions for employee fringe benefits, such as entertainment and, in certain circumstances, meals and transportation

Personal Provisions

  • Raise the alternative minimum tax exemption and the exemption phaseout threshold
  • Adjust individual income tax rates and thresholds, creating seven rates of 10%, 12%, 22%, 24%, 32%, 35%, and 37%.
  • Increase the standard deduction to $12,000/$18,000/$24,000.
  • Repeal personal exemptions
  • Increase the child tax credit amount to $2,000. Initially, only the first $1,400 of the credit is refundable
  • Decrease the phase-in threshold of the refundable portion of the credit to $2,500
  • Increase the phaseout threshold of the credit to $400,000 for married filers and $200,000 for other filers
  • Create a $500 nonrefundable credit for non-child dependents
  • Cap the deduction for state and local taxes paid at $10,000
  • Cap the mortgage interest deduction at $750,000 of acquisition debt
  • Eliminate several other deductions
  • Limit the casualty loss deduction
  • Modify limits on the charitable deduction
  • Repeal the Pease limitation on itemized deductions
  • Modify or repeal other personal deductions, credits, and exclusions
  • Index bracket thresholds, the standard deduction amount, the refundable portion of the child tax credit, and other provisions to chained CPI

Keep in mind this list is not all inclusive. I am still sorting through this “post card filing” law. Contact us for more details and to discuss what your individual and business needs.