Personal Finances - 2017

Personal Finances - 2017

The Impending New Tax Legislation

Our Congress is in a giant flux right now about the tax proposals. The three branches have to come together and see things eye to eye to be able to pass the tax law. One would never know but it is doubtful if they would be able to get something passed soon; we just have to wait and see. One thing is for sure: whatever passes will affect every one of us working folks. It does not matter what immigration status you have; whether you are a student, H1B visa holder, temporary or permanent resident, a naturalized citizen or any other category. This law will affect all those who have income. They should be interested not only in the passage of this law but also in the form and shape it takes eventually and should be carefully watching what Congress is doing. Ironic fact about this legislature is that even the students, especially Graduate level, will end up paying some taxes on their free tuition offered by the University (see one of the questions later). Unlike other legal situations, everyone has his/her skin in this game.

My strong suggestion would be that even if you are not a citizen and cannot vote, since you are still very much affected by the law you should write to your congressman and the two senators, letting them know what your feelings are.

All middle class families have to be very vigilant about this. I am giving below answers for some of the most frequently asked questions.

Will Congress actually pass the legislation?
I believe the answer is yes. Failure is not an option for the Republicans, who control Congress, because this calendar year they have been fairly ineffective in passing any major legislation and that is a sour spot for them. They are so hell bent on passing this legislation that they may not even consider the long-term effects of passing such law, for the country or for our indigent citizens.

Will tax cuts apply to 2017?
In theory, Congress can make it retroactive; but that will be very impractical, unfeasible and ill advised. After passing the law, the real work then begins to convert the law into a meaningful regulation and it takes a long time like months if not longer. Besides, IRS has to adapt its own system to the law. My thinking is it will be effective for 2018.

I understand the standard deduction is doubling?
Yes, it is. But they giveth with one hand and taketh away with the other. They are doubling the standard deduction from $12,000 to $24,000 and this is done because they are taking away so many of the deductions from the itemized form. At the same time the ‘Personal exemption’ that was available for every member and dependent of the family is taken away which neutralizes the benefit of doubling the standard deduction and worse for some.

Will municipal bond interest still be tax-exempt for federal tax purposes?
Fortunately, yes. I have not seen any thing in print or talked about that will make changes to this popular break as part of tax reform. It is good news not only for individuals, especially seniors, who own municipal bond investments and rely on its interest but also for states and cities that rely on these bonds to fund infrastructure projects.

What is the story on tax rates for capital gains and dividends?
For most individuals, the 15% max tax rate will stay the same; at least there is no movement on it yet. Same thing for 3.8% net investment income surtax on upper-incomers. It is not clear how the new package will affect the 20% capital gains tax rate for upper income folks and 0% rate for filers now in the 10% or 15% bracket. The brackets appear to be changing and it is not clear how both rates will be shifted by the lawmakers.

What is the latest on mortgage interest deduction for home owners?
The two bills are different right now. The senate bill preserves the current law allowing deductions on a total of $1M of mortgage debt on as many as two homes. The house bill would allow homebuyers taking out mortgages after Nov 2nd to deduct interest only on a max of $500,000 of debt and only on one home. Both bills end interest deduction on home-equity loans.

What about pass-through incomes for small businesses?
Many residents of Indian origin have small business on the side or as main business and this item might be of interest to them. Both bills cut taxes on some income earned by so called pass-through firms such as Partnerships and S corporations. But the rates and the categories of business owners who would benefit differ. What will culminate into the final law is not clear yet. Business owners who would benefit from this should defer their income into 2018.

Is anything changing about social security?
Social security wage base will go up by $1,500 to $128,700 in 2018. But that has nothing to do with the new law; it would have happened per rules any way. There is no change in social security tax rate for employers or employees.

Are students affected by this new proposal?
Probably, yes. At Graduate level most students were given tax-free status of tuition especially if they do TA and RA work for the University. This free tuition will be considered as income for the students and they or the University will be paying regular income tax on it.

It is clear to me that the new proposal, contrary to what the Republicans are tooting, is going to affect the middle class adversely. And the prime force behind this is to reduce taxes on Corporations and for the top 1% of the population. In the process we are adding about $1.5 Trillion additional debt to the society. National debt is perhaps the biggest threat to our national security; something worth thinking about.