As the Biden administration this week signaled it is aiming to push for some of the Trump-era tax cuts, slated to expire at the end of next year, Americans may have to pay more in taxes unless Congress doesn’t renew it.
“The president is clearly focused on tax fairness,” she stated. “He’s going to be focused on making sure that tax cuts disappear for those corporations, and we’re not negotiating new tax breaks for wealthy individuals.”
What It Means
Notably the tax cut bill created several changes to the U.S. tax code, including to income tax rates.The tax law, passed by Republicans with no Democratic support at the time, lowered the corporate rate from 35 percent to 21 percent and cut individual taxes across income brackets for eight years. It doubled the standard deduction and enhanced the child tax credit. And it closed or tightened various tax breaks most notably by capping the amount of state and local taxes that can be deducted which had its biggest impact on residents of high-tax, largely Democratic-run states.
Under the law, highest individual tax bracket dropper from 39.6 percent to 37 percent, while the 33 percent bracket dropped to 32 percent, the 28 percent bracket dropped to 24 percent, the 25 percent bracket went to 22 percent, and 15 percent bracket went to 12 percent.
If it reverts back to the pre-2017 brackets, it means that every taxpayer might need to look at their spending because they could pay up to 4 percent more in taxes unless the provisions are extended within the next two years or so.
An expiration of the plan will have major impacts on estate and gift taxes for individuals. The measure doubled the gift and estate tax exemptions, raising it to $11.18 million in 2018 from $5.49 million in 2017.
When adjusted for inflation, the exemption now stands at $12.92 million, meaning that an individual can pass that amount in assets without paying federal gift or estate taxes.
As for standard deductions, less income is subject to being taxed under the Tax Cuts and Jobs Act (TCJA). It increased that deduction to $12,000 for single filers from $6,5000, $24,000 for joint filers or up from $13,000 pre-2017, and $18,000 for the heads of a household, which is up from $9,550, according to the Tax Foundation.
The vast majority of Americans, according to a Forbes estimate, opt to use the standard deduction when filing their taxes. That’s opposed to using itemized deductions.
Warning
Julio Gonzales, tax professional and the CEO of Engineered Tax Services, warned in an editorial that Congress faces the “harsh reality” of potentially rescinding the tax cuts, which would cause havoc for numerous businesses and families.“We are in a situation in which many American families and businesses are hanging on by a thread. Letting the non-permanent provisions of the TCJA expire could be catastrophic to our overall economy and the well-being of many working families,” Mr. Gonzalez wrote for RealClearPolitics.
His editorial then warned that “individuals seeking to preserve their wealth and businesses should begin financial planning around the expiration of the non-permanent provisions of the TCJA” and to “plan for the worst and hope for the best, as they say.”
“The bottom line? If you think the economy is bad now, it’s going to get a lot worse if Congress lets the non-permanent provisions of the TCJA expire,'” he stated. “We must demand that our elected representatives don’t allow this to happen.”
