By Jerome E. Horton; Member, 3rd District --State Board of Equalization
Over the weekend, the Senate Republicans passed their version of the Trump Tax Plan that will not only impact the amount of taxes you will pay; it will also impact your ability to build wealth, educate your children, preserve your health, plan your estate, and grow your business in California.
It provides a $10,000 special tax-free college savings credit to pay tuition for private and religious K-12 schools, disproportionately benefiting rich families who can afford private schools, tutors, personal trainers, and parental volunteering. This incentivizes a decline in public school enrollment without any effort to equalize education for all children. The bill would also bar school districts from using cost-effective, tax-free “advance refund bonds” to lower their debt by refinancing school bond debts. The bill also exempts private colleges with large endowments from a 1.4% excise tax on investment income, including Michigan’s Hillsdale College, whose benefactors include President Trump’s education secretary, Betsy DeVos. You would think education equalization would be a number one priority for Congress given that if we fail to dramatically improve student success in higher education, our nation will suffer from a shortage of skilled workers needed to ensure global competitiveness and national security – according to studies conducted by the Bill and Melinda Gates Foundation. These measures will place even greater pressure on an already seriously underfunded California public school system.
Here are a few more key provisions of the Senate Republican tax plan. Their plan repeals the mandate requiring Americans to either obtain health insurance or pay a fine, and thirteen million Americans are projected to choose not to obtain health care through the Affordable Care Act. This means the government would no longer have to pay billions of dollars to subsidize their health care plans and, unfortunately, poor and middle-income Californians whose employers do not provide healthcare coverage would be forced to pay higher Covered California Health Care premiums or be pushed into local emergency medical care, shifting the burden to the counties and the state. It continues to allow charitable deductions, but the deduction for casualty losses in the case of theft, floods, or even home damages sustained from California wildfires was eliminated. However, people who don’t itemize deductions because they do not have itemized deductions in excess of the standard deduction would not have a tax benefit from their charitable deductions. However, those who itemize their deductions would find it beneficial to actually increase their charitable deductions to offset for the other deductions eliminated.
Property taxes remain deductible up to $10,000. If you live in Los Angeles County you should watch out for the 14 different property tax add-ons because they may push you over your limit. Mortgage interest is still deductible if your debt is under $1 million and the interest is not the result of a home equity loan. Purchasing a home with the equity from another property may not be wise and instead you may want to refinance depending on other factors. The Senate plan preserves the Alternative Minimum Tax, which hurts filers making between $200,000 and $1 million. The plan expands deductions for medical expenses by reducing the threshold limitation from 10% to 7.5%, allowing more people to claim medical expenses that exceed 7.5% of their adjusted gross income. If you are planning an operation with high deductibles, consider getting it done before the end of 2018. However, the House plan eliminates the medical expense deduction, so wait a few weeks before you incur major planned health expenses. Other interesting features of the Senate plan include increasing teachers’ classroom expense deduction, which would go from $250 to $500 – a $250 benefit for teachers, and retaining the refundable earned income tax credit of up to $6,500. In addition, the child tax credit would be expanded from $1,000 to $2,000, but the additional $1,000 would be nonrefundable. In the past, if you owed zero taxes you would get a refund for the full credit, but under this plan the refund would apply only to the first $1,000.
Mostly wealthy Californians, who pay the highest state income and sales tax in the nation, will no longer be able to deduct these taxes. However, if they own a business the tax plan cuts the corporate tax rate to 20% from 35%, which offsets the loss of the state and local tax deduction – but this rate reduction will not go into effect until 2019. The Republicans are hoping to encourage businesses to support their re-election in 2018 in order to preserve the 15% reduction in their tax rate. The plan also allows businesses to immediately and fully expense new equipment for five years, then phases the provision out by 20 percentage points per year thereafter. The House tax plan lowers taxes on pass-through business income such as partnerships, who pay tax on them on their personal returns under ordinary income tax rates from 39.6% to 25%, and phases in a lower rate of 9% for businesses that earn less than $75,000, but the Senate plan allows a 23% deduction against the income if it is less than $500,000 for married couples and $250,000 for singles. Additional provisions would subject salary draws to ordinary income tax rates and prevent the re-characterization of wage income as business profit to get the benefit of the pass-through deduction. The Senate plan would also prohibit pass-through entities that provide professional services, such as lawyers and accountants, from taking advantage of the lower rate.
Both tax plans would require companies to pay a one-time low tax rate on their existing overseas profits. Multinationals would no longer be able to defer or avoid U.S taxes by leaving profits overseas in switching to a “territorial” tax system. Currently, California companies pay taxes on all of their income regardless of what country they are doing business in, but they are allowed to defer paying taxes on their profits until they bring the money home. This is commonly referred to as a “worldwide” tax system. This sounds like a good thing until you take a closer look. As the old saying goes, “the devil is in the details,” because this provision could provide a huge windfall for rich multinational companies while hurting California employees in the long run.
The next step is for the Senate and Congress to reconcile their differences and present a final bill to the President, which he willundoubtedly sign. Stay tuned, because the language is evolving –including proposals to exempt cruise ships from taxes while docking in Alaska, allowing deductions on credits related to expenditures in connection with legal marijuana sales, and exempting kombucha tea from alcoholic beverage excise tax. I suggest that you consult a tax expert on wealth-building tax strategies such as estate planning; converting your salary income to investment income; avoiding California’s high gas tax by buying an electric or hybrid vehicle, which could provide you up to $7,500 in tax credits; and consider making a donation to your local public school – it is going to need it.