Q: The topic of tax reform is all over the news recently. What are the biggest changes people will see?
MM: That answer really depends on two things: income level and whether or not you own a home.
If you own a home, the government allows a deduction for mortgage interest and property taxes. Prior to the tax legislation passed in December, if those expenses exceeded $6,350 for a single person or $12,700 for a married couple, you could reduce your income by the total of the expenses, plus a few others.
Q: So what is the impact?
MM: First, Congress limited the dollar amount of state and local taxes that can be deducted to $10,000. At the same time, Congress increased the standard deduction to $12,000 for a single person and $24,000 for a married couple.
Essentially, this means that fewer people will have expenses that exceed those standard deduction amounts, so many more will itemize. That might be simpler, but means the tax benefit of owning a home has substantially decreased.
Q: What if you don’t own a home?
MM: Depending on your income level, this could mean you see a little more cash in your pocket on payday…but this is a short-term benefit, since the tax cuts will go away in 2025.
Q: What are some other effects?
MM: If you have children, you need to know that Congress got rid of something called the personal and dependency exemption. It’s a deduction of about $4,000 just for being alive and in possession of a social security number. So people with children might see taxes go up, even though the standard deduction was increased to somewhat compensate for this.
Those who own their own businesses and operate as a sole proprietorship, partnership, or S-corporation might be able to benefit from a new deduction to reduce income, but this has limits.
Q: What are the trends in tax legislation over the past few decades?
MM: Congress is only focused on short-term effects. In fact, the tax cuts for individuals are scheduled to expire in seven years, so this isn’t true reform.
Q: So Congress is only considering short-term effects. What are some of the long-term effects of this legislation?
MM: The massive increase in both yearly deficits and the overall total debt. Government budgets are just like household budgets: When tax revenue collected equals government spending, then the budget is balanced. If the IRS collects a little more than Congress spends, then we are in a surplus position. The last time that happened was in 1998.
For several years now, spending has exceeded tax revenue collected, creating a yearly deficit. This might be an issue for a household budget, but the U.S. government essentially has an unlimited credit to swipe in the form of debt issuance.
This works out okay when interest rates are low, as they have been since the 2008 recession. But as interest rates rise, that debt gets tougher and tougher to pay back. Eventually, Congress will have to raise taxes to pay for the things it wants to buy. A tax cut today is borrowing from the future.
Michaele Morrow, a member of the National Tax Association, American Accounting Association, American Institute of Certified Public Accountants, and the International Fiscal Association, is quoted frequently in the press on matters related to tax policy and reform.
Learn more about Suffolk's Master of Science in Taxation (MST) program.