Trump’s signature tax plan promises to deliver immediate results for many middle-class families and those with even smaller annual incomes. A recent article explained the new tax withholding tables for the tax plan passed in December of 2017. According to Yahoo Finance, a worker earning $60,000 per year—which is the median income of American citizens—would save $112 per month, or about $1,344 per year. [1]
Borrowing from Peter to Pay Paul
Any tax changes are certain to result in winners and losers, and critics of Trump’s tax plan insist that it benefits the wealthy more than the middle and lower classes. Many people’s paychecks will; immediately begin to get larger, but not everyone will see higher take-home pay. The tax bill eliminates the deduction for state and local taxes, so taxpayers in high-tax states will seldom realize big benefits from the changes. The new withholding tables are scheduled to take place in middle February of 2018. However, there are potential savings based on changes in the inheritance tax. The so-called “death tax” has long been a target of Republicans who’ve tried to enable wealthy supporters to pass on their wealth without high taxes.
Most Americans Expect Significant Cuts in Tax Liability
Our San Jose tax attorneys spoke with a gentleman from Milpitas who said “I’ve got a wife and 3 kids to look after, so I could definitely use a few extra dollars on my paycheck. The cost of living in the bay area is difficult to keep up with even with a great job.”
Although most groups can expect lower taxes and less withholding, the new tax tables don’t reflect traditional deductions for larger families. [2] The Newsweek study estimated that a single person earning $50,000 per year would have a tax bill that’s $974 lower than in 2017. Married couples earning $75,000 per year would pay $1,033 less, which is a 59% savings. A wealthy couple earning $1.5 million annually paid about $439,275 in taxes under the old tax regulations. Trump’s plan would result in a 20% increase in tax liability, or a bill of $527,268.
House Speaker Representative Paul Ryan (R-Wisconsin) commented on the new withholding tables. Ryan suggests that these savings would be a big boon for most families. Unfortunately, not everyone agrees. Taxpayers in states with high state income tax rates and local income taxes won’t be able to deduct their taxes from their federal tax bill. That means that those taxpayers could end up paying even more taxes.[3]
Inaccurate Withholding Risks of Trump Tax Plan
The total tax liability is hard to predict because so many common deductions have been eliminated. Many people who accept the new withholding strategy could end up owing higher taxes than withholding covers as well as penalties and interest. There’s no guarantee that the new tables will be 100% accurate. Every change in IRS policies generates thousands of hours of extra work for tax preparers, and even Trump’s simplified taxes are no exception.
Some Democratic members of Congress have complained that the White House might encourage “front-loading,” or “juicing” of the new tax benefits. [2] In this scenario, getting their tax benefit immediately is expected to please taxpayers and possibly result in better prospects in the 2018 elections. Treasury Secretary Steven Mnuchin emphatically denied that any sort of “front-loading” was being done. “Absolutely not,” Mnuchin insisted.
Although each family could receive a lower or higher tax bill based on particular circumstances, most people will receive a substantial tax cut and immediately higher paychecks. The new withholding tables are scheduled to go into effect immediately, so you should begin seeing your benefit soon.
References:
[1] https://finance.yahoo.com/news/trump-changing-paycheck-heres-225928985.html
[2] https://www.newsweek.com/will-you-pay-more-or-less-tax-under-trumps-plan-four-easy-charts-725873
[3] https://www.nytimes.com/2017/12/04/business/economy/tax-bill-new-york.html