New tax law: NJ middle-class families won’t come out ahead, expert says
The Republican tax bill was approved by the House on Tuesday afternoon and was expected to go for a vote in the Senate later in the evening.
Republicans have touted the $1.5 trillion tax package as legislation that will help the middle class. But will it benefit you?
The answer seems to be that it depends on the specifics of your situation.
The standard deduction used by most families would be nearly doubled to $24,000 for a married couple.
The bill would slash the corporate income tax rate from 35 percent to 21 percent. The top tax rate for individuals would be lowered from 39.6 percent to 37 percent.
It scales back a popular deduction for state and local taxes, a move that Republican congressmen from New Jersey had opposed.
Single and renting
According to Peter Greco, the chief tax researcher for CSI Group, for someone with a modest yearly income and who is renting, the new tax law will probably be beneficial.
“People that earn $35,000 to $40,000 a year will benefit from the bill because they will not be paying any income tax, and if they have children they’ll be receiving additional credit for the kids,” he said.
So how big will the benefit be?
“I would say it’s probably more than a thousand dollars because of the credits built in. some of them may also be receiving the earned income credit.”
In fact, Greco said those making up to about $90,000 a year should also benefit, if they’re renting.
“Usually they do not deduct real estate taxes, nor do they deduct the state income taxes, so those people can now deduct up to $24,000 of a standard deduction, versus the $12,000 we had prior to the new law,” he said.
Middle-class family with home
What if you’re a middle class family, where both the husband and wife work with a combined income of around $100,000 a year? He said this group may wind up paying a little more in taxes.
Greco pointed out with the new tax law the government is essentially trying to “eliminate most people from itemizing, and they want most people to take what is called the standard deduction, which again, is $24,000.”
Under the tax plan, homeowners will only be able to deduct up to $10,000 in state and property taxes.
As far as how much additional tax a middle class New Jersey family might wind up paying, he said “it’s difficult to come up with a number because of the variables involved, but an earlier analysis pointed to about $400 more. The tax bill would be a little bit higher under the new law.”
More affluent family
The new tax law could also wind up costing an upper-middle class family in the Garden State more.
Greco said for a family with a couple of kids earning in the $250,000 range a year, when it comes to itemized deductions, “these people will lose big because people who make $250,000 usually have higher state income taxes paid, they have a higher real estate tax paid, and also they have a higher mortgage — and their deduction limit will be $10,000."
Under the new tax law, the mortgage deduction will be capped at $750,000, a quarter of a million less than it has been.
He pointed out the upper middle class family, if there are children, will benefit a bit from the increased child tax credit. It had been $1,000, and now goes to $2,000.
How much more this higher-earning family could pay in taxes is uncertain, he said, because “we haven’t even looked at it yet because there have been so many last-minute changes.”
Small business owner
Greco said many small-business owners who employ a few people and earn about $100,000 a year should benefit from the new tax law.
He said small businesses for the most part, making $100,000 to $150,000 a year, may be taxed as an S Corp (a subchapter corporation taxed as a partnership).
“These people will make out because they’ll be able to deduct 20 percent off the top.”
He also said small-business owners may also want to investigate establishing what’s known as a C corporation in order to take advantage of the new 21 percent tax rate being established for these entities.
Greco said small businesses should benefit if they buy equipment. In the past, they took a deduction over a number of years through depreciation, but now they’ll be able to take a deduction in the year the purchase was made.
How did they vote?
The House of Representatives on Tuesday voted 227-203, largely along party lines, to approve the rewrite of the tax bill.
U.S Rep. Tom MacArthur, was the only congressman from New Jersey to vote in favor of either the first or final bill. The state's other Republicans — Leonard Lance, Rodney Frelinghuysen, Frank LoBiondo and Chris Smith voted with the Democrats against it.
In a last-minute glitch, Democrats said three provisions in the bill, including one that would allow parents to use college savings accounts for home-schooling expenses for young children, violate Senate budget rules. House Majority Leader Kevin McCarthy, R-Calif., said the House would vote on the package again on Wednesday, after the Senate removes the problematic provisions and passes the bill.
The Associated Press contributed to this report.
You can contact reporter David Matthau at David.Matthau@townsquaremedia.com