December 15, 2017

The Real Deal On The 2018 Tax Changes

With tax season looming, the current administration is hard at work implementing changes to an already complicated tax code. The administration believes the upcoming changes will work to strengthen the middle class, reinvigorate business and increase employment rates.

Unfortunately, though, most of the upcoming tax changes will do little, if anything, for the state of the economy.

Below, you’ll find a detailed list of major tax code changes for 2018, as well as a quick look beneath the surface detailing why some of them may not be as beneficial as they seem at first glance.

1.) Higher contribution limits for retirement savings
Most retirement plans – think 401k, 403b and more – currently have a limit of$18,000 on employee contributions. The new code will increase that limit to $18,500. This change is fairly simple and beneficial for the individual – if not for the economy.

2.) Deductible contribution changes
Individual retirement accounts (IRAs) have contribution limits that are relative to income level, some of which will now be subject to change. The phase-out ranges for contributions to IRAs and Roth IRAs will increase for many people.  Talk to our financial advisor to learn more about setting up your retirement account.

While these increased deductions sound wonderful at first, a deeper look shows that they may not be all that beneficial. The changes to the retirement plans are great – so long as one has the increased income to contribute to their plans. Otherwise, they won’t make much of a difference. This change will also have little effect on the overall economy.

3.) Increased credits and deductions
Those who are married and filing jointly will have a standard deduction of $13,000, a $300 raise from $12,700. Single taxpayers and those who are married and file separately will see their standard deduction rise to $6,500. For heads of households, the deduction will be $9,550.
In addition to these changes, there will also be increased deductions and credits for children, as well as a new tax credit for non-child dependents.

The increased tax deductions and credits can be helpful to some people, but won’t help struggling parents much. A one-income family supporting itself on a minimum wage salary doesn’t have that much of a tax burden to begin with. These changes may help the middle class, but they won’t help the many others who can really use a break.

4.) Elimination of estate tax and tax cuts for the wealthy
This change may be good news for the 1%, but it is obviously not helpful for the distribution of income throughout the remaining 99%. A capitalist economy flourishes from the bottom up, and putting more money in the hands of the spenders is what essentially helps the economy thrive. Doing the exact opposite won’t affect much growth.

5.) Reduced taxes on repatriated funds
In an effort to bring work from American companies back to our shores, the administration has promised to reduce taxes for companies who make this move. Sounds rosy, but in reality, it’s hopelessly futile. Most American companies that have plants and warehouses overseas do so because the cost of labor is a whole lot cheaper abroad.

For example, an average U.S. auto worker earns close to $30 an hour, compared with a worker in Mexico earning just over $5 an hour for the same work. To offset the cost of paying American workers to replace workers overseas, a tax cut would have to be enormous and fairly impossible to implement.

Higher contribution limits for retirement savings

6.) Simplified tax bracket system
The current tax brackets will be consolidated to create a simpler system. For example, the 39.6% tax rate will now affect individuals with an income exceeding $426,700. Top rate will now kick in for married taxpayers who file jointly at $480,050.

These, and similar changes, promise to make tax time less of a headache. It remains doubtful, though, that these changes will affect the economy in a positive way.

7.) Tax rate changes for small businesses
This change is being implemented with the rationale that, by giving small businesses a minor tax break, they will be able to hire more workers, and thus decrease the unemployment rate.
The problem with this reasoning, though, is that small businesses don’t hire workers when they have less expenses; they hire workers when their business is growing at a rate in which their current staff cannot meet their clients’ demands. Therefore, while many small businesses may appreciate the tax cut, it is unlikely that this change will affect unemployment rates.

8.) Corporate tax rate cuts
Similar to the change in tax rates for small businesses, the theory here is that these changes will stimulate economic growth and employment. But, as argued above, firms generally don’t increase their hiring rate because of decreases in their tax burden. To make it worse, lowering the tax rate for the bigger companies has the potential to consolidate their power, essentially doing more harm than good for the economy.

9.) Fiscal responsibility
Perhaps the most dramatic change that the new tax code will generate is reduced government spending. All of these cuts need to be paid for, though. When they’re sponsored by Uncle Sam tightening his belt, that means there will be a lot less of government money injected into the economy – and that’s never good news.

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