Penn Wealth Publishing

2018.03.25 Penn Wealth Report Vol 6 Issue 01

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Penn Wealth RePoRt Copyright 2018. All Rights Reserved. investment intelligence command & contRol tactical aWaReness 6 Penn Wealth rePort voluMe 6 issue 1 25 Mar 2018 Taxation It was a long-fought battle—one which detractors had predicted (and hoped) would never bear any meaningful fruit. But all of the naysayers and critics, with their own personal agendas, have been defeated. On Friday the 22nd of December, the president signed the early Christmas gift, giving Americans—across the eco- nomic spectrum—a massive tax cut, the likes of which has not been seen in over three decades. Will the new tax law really lower my taxes? There were a litany of false narratives writ- ten about the tax reform bill, and too many Americans still take what they read in the papers and see on TV as gospel. Here are a few examples of the bunk we heard in the weeks leading up to the plan's passage: • "The tax plan only helps the rich" • "My mortgage interest deduction is gone" • "I can no longer deduct my student loans" • "I can't deduct my state taxes any longer" • "I can't deduct my medical expenses" • "The child tax credit is gone" • "The real estate market will be decimated" These statements run the gamut between misleading and outright false. So, let's take a deeper dive and see what the new bill really does, and separate fact from fiction. Your tax return on a postcard? Ever since former Congressman Dick Armey of Texas famously waved around his tax postcard in the mid-90s, an ultra-simple tax return has been the dream of everyday Americans, and the nightmare scenario for tax preparers and tax lawyers across the country. Most never believed that day would actually come, con- sidering the power of the lobbyist groups fighting for the status quo. However, when Americans sit down in early 2019 to begin preparing their 2018 taxes, something very close to this dream will become reality for about 75% of all taxpayers. How, exactly, does the new tax law achieve this level of simplicity? It certainly wasn't done by the reduction of tax brack- ets. President Trump wanted the current seven brackets truncated down to just three, while the US House wrote four brack- ets into their tax bill. In the end, however, the US Senate demanded that the num- ber of brackets remain the same. What did change, however, was the rates for each, and the near-doubling of the stand- ard deduction. Under previous law, a married family filing jointly had an automatic standard deduction of $13,000. The new standard deduction is nearly doubled, to $24,000. This means that millions of taxpayers who itemized deductions in the past will not need to under the new law unless they can dig up over $24,000 in write-offs. Nearly 50 million households (roughly 30% of all fil- ers) itemized their taxes under the old law; expect that number to be greatly reduced with the new standard deduction. The new rates for each bracket The number of brackets may have stayed the same, but the rates in each did not. Without getting into the mundane details and specific adjusted gross income cutoffs, the 12% bracket is reduced to 10%, the 15% bracket is reduced to 12%, the 25% bracket is reduced to 22%, and the 28% bracket is reduced to 24%. The 24% tax bracket takes us all the way up, now, to $315,000 of adjusted gross income (from $237,950 under the old 28% rate), so it becomes abundantly clear that nearly every taxpayer is going to make out better under the new plan. And remember, the standard deduc- tion for a married couple filing jointly was raised to $24,000. Even if you make more than $600,000 per year your tax rate (above that amount) is still reduced—from 39.6% to 37%. Three lies: kids, drugs, and education One of the complaints we heard about the new tax law was that the coveted child tax credit was going away. Simply not true. Not only is the child tax credit still in the new law, it has actually expanded to $2,000 per qualifying child, with the income credit phase-out increased to $400,000 for joint filers. "I can no longer deduct my medi- cal expenses." Wrong. Not only was the deduction not eliminated, it was actually expanded for two years. Under previous tax law, medical expenses must exceed 10% of adjusted gross income (AGI) to qualify for a write-off. Under the new law, that thresh- old will be reduced to 7.5% for the 2017 and 2018 tax years, and then return to 10% in 2019. The AARP's predictable and stale whining about the new law is vacuous. "I can no longer deduct my student loan interest on my taxes." Nope. Former students paying off their seemingly-end- less student loan debt will still be able to deduct the first $2,500 of interest, just as under previous law. What's more, parents saving for their kids' education are about to get a nice treat with changes to the laws surrounding 529 college savings plans. Until now, parents or grandparents have been able to save up quite a bit of money for a child's college education in a 529, with the money growing tax free and even pulled out (for qualified college pur- poses) and spent tax free. But what about all of the parents who pay dearly for their child to attend a private primary or second- ary school? Not only weren't 529 plan funds eligible, parents couldn't even deduct the tuition on their taxes—despite the fact that they pay (through state, local, and property taxes) for the public education system. Under the new law, owners can use their savings in a 529 plan to pay for the beneficiary's private school at any level Tax Reform! The first comprehensive overhaul of the tax code in 30 years has been codified—so what does that mean for your wallet?

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