Tax Reform and What Does it Mean – Part 1
At the end of 2017 President Trump signed into law one of the most comprehensive tax packages seen in the last 30 years. But what does it mean and is it good for Californians. In this two part series we will examine what exactly the tax reform looks like.
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The end of 2017 was marked with a flurry of activity on Capitol Hill as the Trump Administration sought to deliver on a campaign promise to deliver significant tax reform to the American people. Trump did just that and on December 22, 2017 he signed into law the Tax Cuts and Jobs Act, one of the most comprehensive tax reform packages signed into law over the last three decades. Today we start a 2 part series examining the tax reform and what it may mean for Californians.
While the tax reform is now the law of the land, many questions remain as to how this will impact Americans and more importantly how will this impact Californians. While many across America will see some if not significant tax relief related to the new tax reform – here in the high tax state of California, the bill was met with sharp criticism because of some of the provisions that reduced deductions Californians had used for years to reduce their tax burden. Today we will explore some of key provisions of the newly enacted legislation.
The biggest winners were Corporations who saw their tax rates slashed from a high of 35% to a low flat rate of 21%. This will undoubtedly benefit corporations and the employees and we are already seeing many companies announce expanded bonus and pay increases for employees. We are also witnessing significant job creation as corporations begin to invest in to their businesses. This may not sit well entirely with Americans who believe the government caters to corporate wealth, especially since 5 of the 7 individual tax rates remain higher than the corporate rates. However, it bears repeating that corporate earnings are still getting taxed twice. Once when the corporation earns the money and again the money is taxed when paid in a dividend to a shareholder.
Middle class Americans should see potentially significant reductions in their tax liabilities as the mid-tier tax brackets dropped from 28% to 24%, from 25% to 22% and 15% to 12% respectively. The lowest bracket remained at 10% and the upper brackets saw only modest reductions in tax rates. Only the 35% tax bracket remained unchanged as a result of the tax reform. Additionally, the tax reform provided an increase in the standard deduction up to $24,000 for married couples filing jointly and $12,000 for single filers. This increase was nearly double the previous allowed standard deduction.
Probably the single biggest concern with the tax reform is that while the reduction in the corporate rates were made permanent, most of the tax relief benefitting individual Americans, including the reduction in the individual tax rates will expire in the 2025. The reason this is interesting is because Trump appears to be betting on a 2-term presidency. If that happens, he would vacate the presidential office on inauguration day in January 2025 and a new president would be faced with a first term tax increase on most Americans. That is always a bad way to start a presidency.
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