The winners & losers of the 2017 tax reform and how the 2020 election may impact your taxes.
2017 saw the largest overhaul of the tax code in more than three decades, reallocating nearly half a trillion of annual tax dollars. The 2017 ‘Tax Cuts and Jobs Act’, which lowered the top individual tax rate from 39.6% to 37% and cut corporate tax to 21%, down from 35%, had particularly varied impacts throughout the country.
Now, as thoughts turn to the 2020 election, who have been the beneficiaries and losers from the 2017 tax reform, and who will be impacted by the wide-ranging tax policies being proposed by current frontrunners in the 2020 election?
The Winners and Losers
The clear winners of the ‘Tax Cuts and Jobs Act’ have been the richest 20% of American households (living in certain states), foreign investors and corporations, with some more moderate benefits for those further down the income spectrum.
The biggest new loser was the Federal Government, with substantially decreased tax revenues. High-tax state residents were impacted by a new $10k cap on the amount of state and local taxes (SALT) they can deduct from the federal taxes. This increased the total tax burden of many and caused charities to see a small reduction in donations, with the increased standard deduction providing a decreased tax savings incentive to give.
2020 Election Proposals
President Trump has strongly supported the 2017 reforms, but Democratic candidates have attacked it as increasing inequality and contributing to the Federal Deficit.
The four top Democratic candidates (Joe Biden, Pete Buttigieg, Bernie Sanders and Elizabeth Warren), all seek to raise the marginal income, corporate, and capital gains tax rates. However, where they differ is on where they would provide new tax credits and which taxes they would implement or expand. For example, each Democratic candidate except Biden would support implementing a wealth tax, and Biden and Buttigieg are the only candidates to support a Carbon Tax.
Despite these differences, proposed new taxes broadly focus on corporations or the wealthy, while additional tax credits are aimed at the working poor or the middle class. But how do these taxes translate to impact on individuals? We’ve taken a look.
Meet Lily, Ted, and Robin
All three of these Americans benefited from lower marginal tax rates and raised income levels for each tax bracket in 2017, while standard deduction changes were either positive or neutral.
As a partner at a law firm, Lily might have taken advantage of the new 20% deduction on income from pass-through businesses, but because she makes more than $210k, this deduction is phased out. Still, with a high income, she wasn’t severely impacted. She continued to use the standard deduction, seeing a $5k decline in taxable income and a $1.5k decrease in taxes paid.
Ted lives in a state with high taxes and his burden increased because the SALT deduction was limited to $10k. His tax bill also increased when the standard deduction was raised, and Congress took away the ability to claim personal exemptions. With five children, losing personal exemptions for each of them was expensive.
The 2017 reforms also reduced the notional value of a mortgage, for purposes of interest that can be deducted, from $1M to $750k, so Ted’s mortgage lost a quarter of this tax shield. Further encumbered by tax preparation and investment adviser costs – not deductible under 2017’s provisions – Ted saw a large reduction in take-home pay, albeit offset by lower marginal tax rates.
Robin can no longer deduct moving expenses for her work relocation from San Francisco to Austin and her tax preparation and investment advisor fees are no longer deductible. But the 2017 reforms amended the 529 college savings program so parents can use funds for expenses at all levels of education, not just college. As Robin’s daughter is beginning school, early investment may pay dividends. All told, Robin ended up with a higher AGI, but lower marginal tax rates saw her tax bill decrease.
The Effect of 2020 Election Proposals on Lily, Ted, and Robin
All three of our taxpayers would be affected by a full or partial reversal of the 2017 reforms and they would all see tax increases from higher marginal income tax rates. Democratic candidates favor raising the capital gains tax rate or removing the distinction between capital gains and ordinary income, so as Lily edges toward retirement it’s time to review her savings to ensure optimal tax treatment.
Ted’s personal finances won’t be affected much, but since the candidates support a financial transactions tax including stocks, bonds and derivatives, as a stockbroker he might see repercussions in market behaviors or trading volumes. Sanders’ plan to increase the coverage and rate of the estate tax may mean Ted also sees higher tax obligations for his inheritance planning.
Robin on the other hand, still in her prime working years, stands to gain from proposals like that of Biden to incentivize employers who contribute to employee’s retirement savings and add further tax advantages for employees.
Planning for Uncertainty
The individual tax cuts of 2017 are slated to expire in 2025, although Republicans have said a future Congress would extend them. However, the 2020 Democratic candidates are all likely to seek partial or full reversal as well as their own proposed new policies. This combination of uncertainty heightens the importance and value of tax planning now to prepare for a variety of future scenarios.
David Snider is the Founder & CEO of Harness Wealth, which combines innovative technology and human expertise to help clients effectively unlock financial opportunity. Previously he served as COO & CFO of Compass and was an investor at Bain Capital. He is the author of Money Makers: Inside the New World of Finance and Business.
Thank you to John Koskinen for his insights and contributions to this article. John was the Commissioner of the IRS from 2013 to 2017. He previously served as the non-executive chairman of Freddie Mac from 2008 to 2012 and as acting Chief Executive Officer in 2009. John has been President of the U.S. Soccer Foundation, Deputy Mayor and City Administrator of Washington D.C.
1 Based on NYTimes Polling Average (January 23rd, 2020): www.nytimes.com/interactive/2020/us/elections/democratic-polls.html