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How 4 different households would fare under the GOP tax bill

CBS News logo CBS News 12/18/2017 Irina Ivanova

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The tax bill that Congress seems on the verge of passing is supposed to provide "broad relief" to companies and families. "You're going to see happy days starting in February, where hardworking families see that they have more money," Treasury Secretary Steve Mnuchin told John Dickerson on Sunday. 

The Treasury put out an analysis that claims the growth generated by the tax bill would boost the economy by 2.9 percent every year, creating an added $1.8 trillion in revenue for the government over the decade the bill would be law. But that is complicated by disagreement from most mainstream economists, not least the Joint Committee on Taxation's finding that the bill will still add at least $1 trillion to the deficit and grow the economy slower than Republicans had hoped. 

The nonpartisan JCT has also said "every tax bracket" would pay less, on average. Its proponents, including recent supporter Sen. John McCain, have claimed that the bill would "directly benefit all Americans." Critics, meanwhile, point to the millions of low- and middle-income families whose tax cut would be modest and whose taxes would rise in 10 years.

But averages obscure the reality that each family's tax situation is unique. Families earning the same dollar amounts can pay vastly different income tax rates, depending on the particulars of their family and where their income comes from.

The New York Times analyzed how the bill would play out for a wide range of taxpayers classified as middle class -- those earning roughly between $40,000 and $125,000 per year -- and found some common themes. People with children would benefit under the proposed bill, but single earners would not. Higher earners would benefit more. And when the tax rate reductions expire, they would return to their current, much higher, levels.

Here's a look at how four hypothetical households will fare. These examples are simplified, and don't include the effects on payroll taxes -- those paid on the first $118,000 of income to fund Medicare and Social Security.

Married with children

Let's take a couple that fits the archetypal idea of "middle class." Maya and John are married, have two children and two jobs, earning a combined $71,000 -- the U.S. median for a family last year. Like about two-thirds of taxpayers, they don't itemize but take the standard deduction. Let's also assume they contribute a tenth of their joint income to a tax-deferred 401(k) plan run by their employer.

Under current law, the standard deduction and personal exemptions for Maya and John and their two dependents bring their taxable income down to $35,000; they also benefit from the child tax credit, bringing the family's total federal taxes to $2,317. (That figure doesn't include payroll taxes that are also taken out of their paychecks.)

Under the GOP tax plan, they would have slightly more taxable income -- $39,900 -- as a result of a doubling of the standard deduction for a married couple while doing away with personal exemptions. The tax bracket they're in would go down from 15 percent to 12 percent; the child tax credit would also double, reducing their federal liability to just $407. So all other things being equal, the family would save $1,910 in federal income taxes under the proposal.

Married with children, in New Jersey

But in slightly different circumstances, that couple could make out much worse. Let's assume Maya and John are homeowners. Some years ago, after living frugally and with help from generous parents, they were able to buy a $600,000 house in New Jersey. Because they are so thrifty and have excellent credit, they qualified for a very low down payment. 

However, because they live in New Jersey, they pay some of the nation's highest property taxes. Let's also assume that instead of two children, they have one, with the plans to have a second when their finances allow it.

Under current tax law, the couple can still take a personal exemption for themselves and their child even if they itemize. While itemizing, they deduct their state, local and property taxes, as well as the substantial interest they pay on their mortgage, bringing their taxable income to the lowest tax bracket. After accounting for the child tax credit, they would owe just $215 to the federal government in income tax.

Under the proposed plan, Maya and John would still be able to deduct the full value of the mortgage interest they pay. (The plan grandfathers in existing mortgage-holders, while the value of new mortgages is capped at $750,000 for the first two houses a person owns). They could take a property tax deduction of up to $10,000, which is $3,000 less than they can under current law. 

Even so, John and Maya and one of the few couples who would still benefit from itemizing under the new plan. Many similar couples with less pricey mortgages would lose the incentive to itemize since the standard deduction for married couples would almost double, to $24,000. Either way, John and Maya would pay more in federal income taxes than they do currently under the new plan by more than $1,000, even with the increased credit for their one child.

Solo successful lawyer

David, who lives alone, is a very successful lawyer earning $280,000 a year from his practice. Since he's a business owner he takes that money in the form of a profit distribution, rather than a salary. It's what's known as "pass through" income and is taxed at personal income rates. 

David falls into a group of people who are likely to itemize -- very high earners -- but if he chose to be very generous with the government, take a standard deduction and not use any tax advantages to shield his income, he would pay around $72,000 in federal income taxes on his yearly earnings.

The tax plan allows pass-through businesses to deduct 20 percent of their income from their personal taxes. Service businesses, such as accountants and lawyers, get the deduction if they earn less than $315,000. David would need to pay regular income taxes on $224,000 of his profits if he kept a pass-through business structure, for a total of $49,889 in taxes. That's an effective tax rate of 17.8 percent on his total income.

Lawyers who too much to qualify for the 20 percent pass-through deduction could choose to restructure their business differently, as a "C corporation," and pay the corporate tax rate of 21 percent. (Those C corporations would give out their earnings in the form of a dividend, on which the lawyers receiving the dividend would pay personal income taxes.) 

Currently about 80 percent of US businesses are pass-throughs, not corporations, but that could change with the new tax rates. Economists have predicted that having a different set of tax rates for individuals and businesses would create incentives for higher-income business owners like David to restructure to take advantage of the lowest rates.

"The issue is, one set of businesses is taxed at the corporate tax rate, another set at the individual rate," Roberton Williams, of the Tax Policy Center, previously told CBS MoneyWatch. "If you have one undercutting the other, you will have this shift happen."

While many provisions of the tax bill expire in 2025, the corporate tax cuts don't -- meaning that, if David's tax rates rise again, he could simply restructure as a C corp to benefit from the lower tax rate for the rest of his working life. 

An older couple

Finally, let's consider Mark and James, both 63 and living in Florida. Their children are adults living elsewhere, they've paid off their mortgage and they're healthy and active. They intend to retire in several years, but in the meantime both work part-time, earning $57,000. Because they live in Florida, they aren't taxed on the state level. Instead, they pay only about $4,497 in federal income taxes. Under the proposed plan, they would pay $3,579 -- $918 less.

As part-time workers, however, the couple purchase their own health insurance, and they would pay much more for it if the tax plan became law. That's because it eliminates the penalty that individuals who don't have health insurance have to pay. Without such a penalty, health care economists agree that millions of relatively healthy people would drop coverage, causing prices to rise for everyone else to rise. 

Still, there's a silver lining for Mark and James. If their higher health care costs rise beyond 10 percent of their income -- more than $5,700 -- the plan allows them to deduct those costs, too.

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