President Donald Trump has called the $1.5 trillion tax cut that Republican lawmakers are on the verge of passing a Christmas present for the entire nation.
But the fine print reveals that some will get a much nicer gift than others, the benefits will change over time and some will be left out in the cold. Real estate developers and technology companies could see big tax cuts, while low-income households and people buying health insurance could lose out.
With the bill finally headed to a vote this coming week, taxpayers are scrambling to determine whether the legislation renders them winners or losers.
Trump and His Family: Numerous industries will benefit from the Republican tax overhaul, but perhaps none as dramatically as the industry where Trump earned his riches: commercial real estate. Trump, along with his son-in-law Jared Kushner, who is part owner of his own real estate firm, will benefit from lower taxes on “pass through” income, which is money earned by partnerships and other types of businesses whose income is passed through to its owner and taxed at the individual tax rate. Trump and Kushner benefit since they own properties through limited liability companies and other similar vehicles.
Under current law, that income is taxed at rates as high as 39.6 percent. Under the bill, much of that income could be taxed at a rate as low as 29.6 percent, subject to some limitations. Real estate also avoided new limits on interest deductions and retained its ability to defer taxes on the exchange of similar kinds of properties. The benefits of lower rates on pass-through income will extend to Trump and Kushner’s partners at real estate investment trusts as well. At the last minute, lawmakers added language to make it easier for real estate owners to avoid some of the pass-through provision’s restrictions and maximize the tax benefits even more.
Big Corporations: Industries like big retailers will benefit from the new corporate rate of 21 percent, since those companies pay relatively close to the full 35 percent rate. Other aspects of the corporate tax cuts will be enjoyed by an array of multinational industries, particularly technology and pharmaceutical companies, like Google, Facebook, Apple, Johnson & Johnson and Pfizer. Such multinational companies have accumulated nearly $3 trillion offshore, mostly in tax haven subsidiaries, untouched by the U.S. taxman. The tax bill will force those companies to gradually bring that money home, but it will be taxed at rates ranging from 8 percent to 15.5 percent. That’s far lower than the current 35 percent tax rate on corporate profits and even lower than the new 21 percent rate.
Plus, U.S. companies will no longer owe full corporate taxes on future profits they say they earn abroad, providing more incentive to push income into tax haven subsidiaries. The law even includes provisions that could encourage companies to move workers abroad, despite pledges to do the opposite.
Multimillionaires: An exemption for estates that owe what Republicans call the “death tax” was lifted to $22 million from $11 million. That doesn’t matter much to billionaires like Charles Koch, but means a big tax cut for people with estates worth tens of millions of dollars. Plus, the top rate applying to wages and interest income would be cut to 37 percent from 39.6 percent.
Private Equity Managers: During the campaign, Trump railed against wealthy investment managers who, thanks to the carried interest loophole, pay taxes on the majority of their pay at a lower capital gains rates. But the purported reform to this tax provision will affect few if any private equity managers, leaving the loophole intact.
Private Schools and the People Who Can Afford Them: Parents would be eligible to use a type of tax-preferred savings plan — known as a 529 plan — to save for their children’s elementary and secondary education. Right now, those savings plans are only eligible for college. But they would be expanded to allow for up to $10,000 a year for tuition at private and religious schools.
The Liquor Business: Excise taxes for small brewers and distillers are reduced in the final agreement. Those industries are dominated by entrepreneurial small businesses often based in rural areas. They also have strong lobbyists, and many are based in states with powerful senators, like Sen. Rob Portman of Ohio. Portman, who tucked a provision to help craft brewers into the Senate legislation, was part of the small team of lawmakers who merged the two bills into a final version.
Architects and Engineers: They were originally restricted in how much they could benefit from the new pass-through provision. If they structure their businesses a certain way, the final version will let them benefit fully.
Tax Accountants and Lawyers: Trump once said his “dream” was to put tax preparation services out of business by simplifying the tax code. But the rushed legislation will probably have the opposite effect, as individuals try and make sense of the complicated new provisions, staggered dates and new rates. The uncertainty and confusion will probably create numerous new opportunities to game the system: tax preparers are sure to see a boom in business advising clients on how to restructure their employment and compensation arrangements to take advantage of the lower tax rates on income reported by corporations and pass-through entities.
People Buying Health Insurance: With the repeal of the individual mandate, some people who currently buy health insurance because they are required by law to do so are expected to go without coverage. According to the Congressional Budget Office, healthier people are more likely to drop their insurance, leaving insurers stuck with more people who are older and ailing. This is expected to make average insurance premiums on the individual market go up by about 10 percent. All told, 13 million fewer Americans are projected to have health coverage, according to the Congressional Budget Office.
Individual Taxpayers in the Future: To stay under the $1.5 trillion limit for new deficits lawmakers set for themselves, they opted to make the cuts for individuals and families temporary, expiring at the end of 2025 — even as the corporate tax cuts will be permanent. Republicans are counting on a future Congress to extend the lower rates, as has happened in the past. But there are no guarantees, and that could mean a big tax increase down the road. What is more, the use of a different, less generous measure of inflation would push taxpayers into higher tax brackets more quickly.
The Elderly: A 2010 law requires that any legislation that adds to the federal deficit be paid for by spending cuts, increases in revenue or other offsets. Some cuts would be automatic, and the biggest program to be affected is Medicare, the health insurance program for the elderly and disabled. Dozens of other programs are likely to be cut as well, but Medicare, which would face a 4 percent cut, is by far the biggest. Republicans say that this rule will be waived and the cuts will be averted, but that will take a bipartisan deal.
Low-Income Families: Low-income families who claim the earned-income tax credit will lose out on at least $19 billion over the coming decade under the bill because of the change in the way inflation is calculated. And a new requirement that families claiming the child tax credit provide a Social Security number is projected to mean a big reduction in the families claiming it, since those who are not in the United States legally would be prohibited, even if their children were born in the United States.
Owners of High-End Homes: Under current law, the interest on mortgages for first and second homes is deductible for the first $1 million of the loan. The overhaul would cut that to the first $750,000 and eliminate the owner’s ability in the current law to deduct the interest on a home-equity loan up to $100,000. This could drive down home prices in some high-end markets; good for prospective buyers but bad for prospective sellers.
People in High Property Tax, High Income States: Homeowners in high-tax states like New York, New Jersey and California could be big losers, particularly if they have high property taxes. Their ability to deduct their local property taxes and state and local income taxes from their federal tax bills is now capped at $10,000. In some cases, that could be offset by the lower tax rates that all taxpayers will owe on their ordinary income.
Puerto Rico: Puerto Rico had sought an exemption from new taxes, citing the frail state of its economy nearly three months after Hurricane Maria. But no such luck. The tax bill treats affiliates of U.S. companies on the island as if Puerto Rico were a foreign country and imposes a 12.5 percent tax on intellectual property. Gov. Ricardo A. Rosselló of Puerto Rico said the tax would hurt the biomedical and technology affiliates that make up about a third of Puerto Rico’s tax base.
The Internal Revenue Service: The tax collection agency has been underfunded and understaffed for years. Now, it will have a raft of new tax rules to deal with that will require upgrading its software, printing new manuals and explaining to confused taxpayers how things work. All this is expected to take place while the commission is working under the supervision of an interim commissioner, who is expected to be replaced sometime next year.