This week, the House passed H.R. 1, the Tax Cuts and Jobs Act, a comprehensive plan to simplify our current tax code in favor of a system that is fairer and has lower tax rates. Over the last two weeks, my staff and I have been working diligently to analyze every aspect of this legislation to determine how it would affect Nevadans should it become law.
I want to once again thank those of you who have provided feedback through my offices and over social media. Given the complexity of this issue, your feedback throughout this process was one of the best resources we used to ensure these updates addressed your specific concerns.
Today’s update will cover some topline measures included in the bill. I’ll be revisiting the impact on individuals, joint filers, and itemized deductions, as well as the overall simplification of the tax filing process under this proposal. I’ll also cover a few new points like the impact the bill would have on businesses and corporations. Finally, I plan to address some of the anxieties surrounding this bill by debunking another batch of misconceptions.
Individual & Joint Filers
Under our current tax code, 75% of Nevadans who are either filing individually or jointly take the standard deduction and do not itemize their taxes. So if you’re one of these individuals, if this bill becomes law, your standard deductions have just doubled and your tax rates – in most cases – have gone down.
I encourage individual and joint filers to compare last year’s tax return to the new plan by using the increased standard deductions and lower tax brackets to see what their treatment would be. However, for the average household in CD-2 with an annual income of around $64,000, the federal tax cut effect is over $1,200 a year with the new brackets and increased standard deductions.
For more detailed information on how the Tax Cuts and Jobs act would specifically affect you or your family, please click here.
Itemized Deductions & Simplifying the System
Presently, only 25% of Nevadans itemize their taxes, of those 25%, the top three itemized deductions are: the mortgage interest deduction, the charitable giving deduction, and the property tax deduction. By far, the largest itemized deduction is the mortgage interest deduction. The average amount of that deduction in Nevada is about $2,500.
As a result of the changes in H.R. 1, which double the standard deduction for individuals from $6,000 to $12,000, the average mortgage deduction is more than exceeded in terms of tax benefit to the filer. Add to that point the fact that the changing of tax brackets would result in most taxpayers, with an annual income below $260,000, moving into a lower tax bracket. By doubling the standard deduction and changing the number of tax brackets from seven to four, the Tax Cuts and Jobs act will ultimately simplify the way Americans file their taxes, saving them both time and money.
However, for those who wish to continue itemizing, the mortgage income deduction, the charitable giving deduction, and the property tax deductions are preserved under the bill and subject to limits which are well above the average of those presently claimed by Nevadans who itemize.
For more information on the most common itemized deductions, please click here.
Businesses and Corporations
With respect to the effect on businesses, Main Street job creators will see their tax rates reduced under this bill through the lowering of the maximum tax rate on business income to no more than 25%. Additionally, federal tax rates on corporate taxable income will see a decrease from the highest rate of 35% to a flat corporate tax rate of 20%. Each of these changes will help businesses and corporations expand, hire new employees, increase wages, and also give them the resources they need to stay competitive in the global marketplace.
The Tax Foundation estimates that the Tax Cuts and Jobs Act could bring 8,001 jobs to Nevada and over 890,000 jobs to the U.S. Furthermore, the Tax Foundation estimates that this tax plan would lead to 3.5% higher GDP in the long run, which could increase taxpayer's income by 2.7% over time.
Repeal of the Alternative Minimum Tax:
The Tax Cuts and Jobs Act would repeal the Alternative Minimum Tax (AMT). The AMT is a tool utilized by the IRS that forces Americans and corporations to calculate their taxes twice each year - and pay the higher of the two. However, according to the Tax Policy Center, the AMT will affect over 5 million taxpayers in 2017 and will likely end up impacting “taxpayers with large families, those who are married, and those who live in high-tax states.” By repealing the AMT, it will provide American families, small businesses, and corporations with more stability and predictability.
Fact v. Fiction
Claim: The GOP tax plan will raise taxes for most working-class families.
You may or may not have seen the Washington Post’s recent fact checker article debunking this argument after several Senate Democrats claimed the Tax Cuts and Jobs Act would raise taxes on all earners falling into the bottom three quintiles of taxpayers. Unfortunately, this false claim led many Americans to believe that if they fell into these quintiles, they would be seeing an almost $800 tax increase. The false calculation failed to mention the more than 97 million (80%) Americans who also fall into these same quintiles and would receive a tax cut under this bill.
Claim: This bill will gut Medicaid, Social Security, and Medicare.
First and foremost, there are no direct cuts to Medicare, Medicaid, or Social Security in this bill. However, I’ve also seen reports overstating the connection between the tax cuts in this proposal and spending cuts. You’ve also probably seen that most sides appear to agree this bill would add $1.5 trillion to the deficit over the next 10 years as a result of lowering tax rates and increasing standard deductions.
Naturally, the immediate reaction is to assume that if we’re bringing in less money by giving people tax cuts, this fall in revenue would need to be offset by cuts to spending for other programs. Unfortunately, these projections neglect to consider the long-term benefits tax reform would have on GDP, such as increased wages and new jobs, thereby increasing the eligible tax base and revenues collected for deficit reduction. Even a 1% increase in GDP generates about $3 trillion in revenue over 10 years – more than covering the anticipated $1.5 trillion deficit. The accuracy of this projection can be further evidenced by going back to the Clinton Administration where GDP growth was at 3.9% – the highest it’s ever been under the last five administrations – and the government was operating under a surplus.
Claim: This bill hurts student debtors, current students, and impacts educators’ out-of-pocket expenses.
Under current law, people can claim adjustments to their income. These items include things like: student loan interest, moving expenses, tuition and fees, and educator expenses. While most people lump these items into the same category as deductions, they are actually not deductions at all since current law allows income adjustments to be taken in addition to the standard deduction.
Although individuals would not be able to claim these adjustments under the new proposal because of the doubled standard deduction, it’s important to consider that unless individuals were claiming the absolute maximum amount of a majority of these adjustments before, these small adjustments to income would still not likely come close to the amount of the new standard deductions ($12,000 for individuals and $24,000 for joint filers). To put this into perspective, the absolute maximum amount student debtors can currently claim is $2,500, while teachers can only claim up to $250 for out-of-pocket educator expenses. The new standard deduction would more than offset either or both of these costs.
I hope this special edition update on the Tax Cut and Jobs Act helps you follow what the House is attempting to do on tax reform. As always, I welcome your feedback so please let me know what you think through my website.
For additional information, please visit my website at amodei.house.gov or call my Washington office: (202) 225-6155, Reno office: (775) 686-5760 or Elko office: (775) 777-7705. To receive updates on what I am doing in Washington and in Nevada’s 2nd District follow me on Facebook, Twitter, Instagram and Youtube.