Not Just a Tax Cut – How the Reform Bill Could Affect You

‘Tis the season for everyone’s favorite topic – taxes!

Yes, it is a bit early, but given our elected officials are hard at work this holiday season dealing with good ol’ fashioned tax reform, we felt it necessary that you, dear students, were informed of proposed changes that could affect you. Currently, there are two proposed bills out there: one by the House of Representatives and one by the Senate.

The plan is that with the utmost cooperation  both legislative branches of government will come up with one succinct bill to place on president number 45’s desk by year-end in order to keep this tax reform moving. Since many of 45’s other campaign promises have failed to see the light of day in his first year, there is a lot of pressure to pass tax reform before his first year is up so it looks like he’s actually doing something. But that’s another topic for another issue.

For those of you who have never touched a tax return because your wonderfully loving parents or your friendly CPA are helping you out, here’s a simplified explanation about how tax returns work. Basically, a tax return reflects income items as well as allowed deductions in order to get down to your taxable income. A tax rate is then applied, depending on which tax bracket you fall into (for example, if your taxable income is $25,000 you would fall into the 15% tax rate bracket). Then, certain credits are allowed to reduce your tax liability dollar-for-dollar if you qualify, and you end up with your final taxes due.

Easy as pie, right? Except for when it’s not, and then the government decides to go and change things.

While these two proposed bills contain more changes than those mentioned here, the overall sense among tax aficionados/general smarty pants/draft bill experts is that high income earners and big businesses are getting some major breaks. These effects aren’t trickling down to the middle and lower classes as much as was promised during president 45’s campaign days. And as 45 is hoping to see a bill on his desk by Christmas in order to ring in the new year with some “Make America Great” tax reform, there is concern that hastily drafted bills could result in overlooking or dismissing important items that affect the working classes.

Tax Rates

The corporate tax rate is going to see a significant drop (from 35 to 20 percent) if either bill gets passed. Not applicable to students per se, but it is important to note that big money could be getting a big break, which seems to be a theme if you dig into all the intricacies of these two bills, but I won’t bore you with that right now.

As for individuals and families, this becomes a sticky subject as to whether the proposed tax rates are helping or hurting certain income levels, and it ties into the loss of the Obamacare individual mandate, which requires you to buy health insurance.

The rates will be dropping some for low-income earners (under $30,000), however people will no longer be required to purchase health insurance, and won’t be penalized for not doing so, as has been the case for the last few years. For those who decide against purchasing insurance, they will also not qualify for tax credits to offset their insurance costs. So, while folks may be paying less in taxes, they may also be without health insurance.

Additionally, with fewer people buying insurance, premiums will increase for everyone else, especially those with chronic or prior conditions.

For those making over $30,000 but less than $75,000, the current proposed House bill, as it is written, will cause an increase in tax for those in this bracket after 2027, given the individual tax cuts are going away after 2025 (take note — the House bill will however, make permanent the business tax cuts).

As for the middle class – also sticky. Some levels of earners could see a reduction in tax, others an increase.

Impacts to Homeowners

Because the Seattle-area housing market continues to boom at a “too-big-for-its-britches” pace, it’s important to note some of the changes that could affect homeowners and future buyers. Currently, homeowners are allowed to deduct interest on mortgages up to $1 million. The proposed House bill wants to drop this down to $500,000. Which, if you know anything about current prices in this area, you know that isn’t going to get you much. The Senate bill would leave the law as is.

Currently, homeowners who itemize also get to deduct their property taxes. The House bill would cap the deduction at $10,000, but the Senate bill would eliminate this deduction entirely.

Thinking of selling because of this booming market? Well, better do it soon, as the current law allows an exclusion on the profits of a home sale up to $250,000 for individuals, and $500,000 for joint filers if you have lived in the house two of the last five years. However, both bills propose that this exclusion only be allowed if owners live in a house five of the last eight years. A pretty drastic change in an era where job mobility is common.

Standard Deduction & Personal Exemptions

When filing a return under the current law, one can take the higher of the standard deduction ($6,350 for individuals, $12,700 for joint filers) or itemized deductions. Itemized deductions come into play for things like home mortgage interest, property tax and charitable deductions. A personal exemption of $4,050 is also allowed for each member of the household, including kids.

The proposed House bill increases the standard deduction to almost double, but gets rid of the personal exemption. In most cases, this would actually result in a larger deduction for individuals and families with only one kid. However, a family of four will receive about $4,000 less of a deduction as they are no longer allowed the four personal exemptions, so the direct result is increased tax for families with two or more kiddos.

See below for the impacts to various filers comparing to 2017 tax law versus the tax bill proposals.

An unmarried filer with annual income of $30,000 would see a decrease in taxable income with the proposed bills.

Annual Income                             $30,000                                                       $30,000
Standard Deduction                         6,350                                                          12,000
Personal Exemption                         4,050                                                                   0
Taxable Income                            $19,600 (2017)                                            $18,000 (Proposal)

A married couple with annual income of $60,000 would see a decrease in taxable income with proposed bills when compared to current law.

Annual Income                             $60,000                                                       $60,000
Standard Deduction                       12,700                                                         24,000
Personal Exemption                         8,100                                                                   0
Taxable Income                            $39,200 (2017)                                          $36,000 (Proposal)

A family of four with annual income of $60,000 would see an increase in taxable income with proposed bills as compared to current law as they would no longer be able to take the personal exemption of $4,050 for the four family members.

Annual Income                             $60,000                                                       $60,000
Standard Deduction                       12,700                                                         24,000
Personal Exemption                       16,200                                                                  0
Taxable Income                           $31,100 (2017)                                           $36,000 (Proposal)

Student Loan Interest Deduction

Currently, students who are repaying back their student loan debt are allowed a deduction on the interest portion of the debt paid during the year. Up to $2,500 is allowed, but keep in mind this would be for a very big loan. While this would result in maximum savings of $625, most people don’t see that level of savings as they aren’t paying that much interest annually.

Under current law, this deduction begins phasing out for those singles who make over $65,000 or couples who make over $130,000.

However, with the proposed House bill, this student loan interest deduction would be completely eliminated. For many people who currently utilize this deduction and see it as some form of relief for what could be very large loans, its elimination would be an additional burden to the already high cost of continued education.

Education Credits

American Opportunity Tax Credit (AOTC):

This credit is available to anyone pursuing a four-year degree, and only allowed during the first four years of higher education. Up to $2,500 of qualified expenses paid can be deducted as a credit (read: dollar-for-dollar reduction in your tax liability). If the credit reduces your tax to zero, 40 percent of the remainder, up to $1,000, can be refunded to you. If your parents are helping contribute to your education expenses and they can claim you as a dependent, they can take this credit.

Under this proposed House bill, an additional fifth year would be eligible for the credit, but at a reduced rate. The Senate bill keeps the credit as is.

Lifetime Opportunity Credit:

This credit can be used for students continuing their education beyond five years. Up to $2,000 of qualified education expenses can be claimed as a credit (and parents can claim for their qualified dependents) but this credit cannot be claimed if you are already utilizing the AOTC mentioned above. The credit phases out for
individuals making over $65,000 a year of AGI or joint filers making over $130,000 a year.

The House bill completely eliminates this credit (remember, they are extending the AOTC one year), while the Senate bill would keep it intact.

Employer-Paid Tuition

Is your employer helping to contribute to your tuition costs? There are companies out there, like Dick’s Drive-in, who find it in the kindness of their corporate hearts to help employees with their educational costs while employees are going to school and working. Currently, up to $5,250 of employer-paid tuition is tax-free, but the House bill gets rid of this nice little benefit. The Senate bill keeps it in place.

Beyond a Bachelor’s Degree

Planning on continuing your education in the world of graduate studies or PhD-dom someday? Anticipating on getting a tuition waiver from a university to help fund your degree as you spend years meticulously studying the space-time continuum or why the bee population is so quickly disappearing? I bet you weren’t counting on the added stress of paying tax on that money too.

Currently, many universities offer tuition waivers to students continuing their education beyond a four-year degree while in return requiring the students to teach classes or aid in research. Often, universities also will pay a living stipend to students in exchange for teaching or research work, which is currently taxable. But if the House portion of the tax bill passes, you will also be paying tax on tuition waive money as though it were income, regardless of the fact you never saw the cash.

By KRISTEN CLARK, Design Director (and CPA!)