Here's how the GOP tax reform plan could affect what you owe Uncle Sam

  • Tax reform
  • 03/11/2017
Here's how the GOP tax reform plan could affect what you owe Uncle Sam
TheHouse GOP tax reform plan is supposed to make filling out a federal income tax return simpler. Backers say it will let middle-income families and those living paycheck to paycheck keep more of their earnings. And it's supposed to lead tohigher wages and more job opportunities.

For the average American, those claims might sound like the House Republicans' plan, called the "Tax Cuts and Jobs Act," is a dream come true.

But as is often the case with any new piece of major legislation coming out of Washington, D.C., not everyone agrees the sacrifices contained in the House Republicans' redesign of the tax code - the first since 1986 - are worth the benefit of allowing most Americans to file tax returns on a postcard-sized form.

Whether you come out ahead or end up paying more in taxes under this proposal depends on your individual situation in terms of income, children, and even where you live, according to several experts interviewed for this story.

Here is a quick look at some of the items in this tax proposal that can help you decide how it may affect you.

Tax brackets: The number of tax brackets shrinks from seven to three or four, with respective tax rates of 12 percent, 25 percent, 35 percent and the top bracket will remain at 39.6 percent, according to a Wall Street Journal story. If simpler is your thing, you will like this. Here is how the brackets break down:

Because of the increase in the standard deduction amounts contained in the proposal, individuals with incomes of up to $12,000 and married couples with income up to $24,000 would pay no federal income tax.

State income tax deductions: This is a part of the plan that might hurt. It would eliminate the ability to deduct state income taxes from federal taxable income. So taking away this deduction could increase your taxable income, which in turn, potentially could push you into a higher tax bracket, leaving you with a bigger federal tax bill to pay.

Property tax deductions: This was an area that had some homeowners worried early on when they heard about the tax reform proposals being kicked around in the nation's capital. There was talk of eliminating this deduction entirely. But t the plan's designers compromised, settling on retaining the deduction for local property taxes but capping it at $10,000.

Chris Humes, a certified public accountant for Baker Tilly in Wormleysburg, said for most people whose income tax forms he prepares, this means no change. "You have to have a substantial home before you would run up against that cap," he said.

But in areas of the state where property tax bills can top $10,000, this could put a bite in the household budget and make buying or building a home in those places simply out of reach.

Mortgage interest payments: Mortgage interest payments would be deductible on new home loans of $500,000 or less. That is a change from the current $1 million cap.

While Humes said this proposed change likely doesn't impact 98 to 99 percent of homeowners in the midstate. But those who live in high-cost areas of the state might feel the pinch from losing this housing tax benefit.

Kathy McQuilkin, president of the Pennsylvania Association of Realtors, said the combination of tax changes affecting homeowners and potential homeowners are very concerning in a state like Pennsylvania, where residents pay a state income tax and some hefty property taxes too.

"Removing these tax incentives and having perhaps fewer homebuyers, we could be looking at an immediate drop in home values, and that's a large concern," she said.

That, in turn, would interrupt investment plans for the millions of middle-class homeowners who look to their home's value as a long-term savings plan, saidRanger MacDonald, chairman of the National Association of Home Builders.

"By undermining the nation's longstanding support for homeownership and threatening to lower the value of the largest asset held by most American families," he said, "this tax reform plan will put millions of home owners at risk."

Child tax credit: The proposed tax credit for children would increase to $1,600 per child, but the $4,050 per child deduction would be repealed. Currently, parents get a $1,000 per child credit, provided their income doesn't exceed around $130,000, Humes said. Under the proposal, the income limit goes away to qualify for this tax credit.

Mike Helveston, director of adviser services of Rodgers & Associates in Lancaster, said taking away the deduction and providing this credit may simplify things but he doesn't believe it will end up making much difference to middle-class families.

Student loan interest: The proposal to eliminate the student loan interest deduction hurts Pennsylvanians more than any other state, according to state Treasury officials. With Pennsylvania college students graduating, on average, owing $35,000 for their education, this proposed change hits this state harder than any other.

"We are already saddling graduates with way too much debt as it is. Increasing taxes on those graduates to pay for new tax breaks is simply wrong," said state Treasurer Joe Torsella.

401(k) contributions: The plan keeps intact the existing rules on 401(k) retirement accounts and the ability of Americans under the age of 50 to contribute up to $18,000 and those over 50, up to $24,000 into the accounts tax-free.

There was talk of eliminating this retirement savings incentive, which raised concern among financial planners that people might lose the incentive to save for their golden years or, as Helveston said, consider trying to shelter their income in other places such as real estate. It wouldn't be good for financial firms if people's money goes into a different type of investment.

Charitable contributions: No change is proposed for the charitable contribution deductions. People would still be able to take a deduction for charitable contributions of up to 50 percent of their adjusted gross income. Humes said almost nobody comes close to hitting that cap.

Medical expenses: The plan calls for eliminating this itemized deduction. For healthy people, this is no big deal. For the not-so healthy and senior citizens who, for example, pay high out-of-pocket medical costs, long-term care insurance or live in a retirement community where expenses can be considered as medical costs, this would be a significant change.

"You have somebody in a nursing home and they are paying a place like Messiah Village, paying them about $10,000 a month to live there and if you have full-blown care, you could be losing out on a potential $120,000 deduction," Humes said. "Usually if you are in that situation, that deduction results in zero dollars of income tax from investment income and the like."

The 429-page proposal contains a myriad of other changes, including one that would reduce the corporate tax rate, which is hoped would spur economic growth and create new jobs. It also would add to the national debt, which was concerning to some of the experts interviewed.

Of course, they also don't expect this plan to be changed substantially before it reaches President Donald Trump's desk. According to a Washington Post story on the plan, Trump wants the legislation to pass the House and the Senate by the end of the year.The Senate Republicans are supposed to unveil their plan next week.
  
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