Photo Credit: Jimmie D. Pike/U.S. Air Force
With tax season in full swing, many people are wondering how their federal and state taxes will pan out for the 2017 fiscal year, crossing their fingers for a refund or lower tax burden.
Next year, these wishes may come true. In December, House and Senate Republicans approved a major tax overhaul that lowered taxes for most Americans—although the wealthy will reap most of the benefits, and the law is expected to increase the national debt by $1.5 trillion over 10 years.
Paychecks should start increasing by an estimated $50–$200 for the average worker this month. However, the reward has caveats that could leave a sour taste in people’s mouths.
The biggest question that most people pose about the new tax law is whether or not they will see any tax breaks, says Erin Towery, a professor at the University of Georgia’s J.M. Tull School of Accounting. “It’s going to depend on their circumstances and what deductions they’ve taken in the past,” she says, emphasizing the importance of the various deductions that were cut, along with a huge increase in the standard deduction.
These changes should tempt many Georgians to opt for the standard deduction, rather than itemizing each deduction. “If your standard deduction is higher than your itemized deduction, you’re just going to take the standard deduction. The benefit for itemizing will be lower,” Towery says.
Higher-earning Athenians should see a tax cut of around 3 or 4 percentage points from the current system, but the largest cuts would be seen by corporations—from 35 percent to 21 percent. These cuts are in hopes that these companies will bring money back to American soil and reinvest in their employees, but many experts are skeptical. “You can pay more money to your employees, including yourself,” Towery says. “In 2004 [when the Bush tax cuts took effect], money wasn’t invested back into companies.” Instead, companies opted to pay shareholders higher dividends.
The law is great if you’re a wealthy individual, real estate broker or any of the various beneficiaries of a pass-through corporation—a business where income collected flows directly to the individual who owns the company—that will receive a 20 percent deduction on their taxes, in certain situations, along with their personal tax cut.
However, the lowest tax bracket—those making under $9,525 as an individual or $19,050 for a couple filing jointly—did not receive a cut under the new law. In Athens, this could include groups like college students, seasonal workers, part-time service-industry workers and other low-income workers. With 28 percent of Athens residents living in poverty (not including college students), that means more than 30,000 people locally will see no benefit from the tax law, and may suffer as Republicans in Congress look to cut social services to make up for the larger deficit.
While it’s true that some will start seeing larger paychecks, this also comes with the repeal of many deductions, such as the personal dependency exemption. For large families or those with dependents that don’t qualify for the child tax credit, this could be a huge burden that the standard deduction alone cannot compensate for.
The law not only changed the tax code, but repealed the individual mandate in the Affordable Care Act, which many believe will cause a spike in health care premiums with fewer healthy persons in the market.
Congratulations, if you are employed by one of the companies that promised employees bonuses or raises, such as AT&T, Home Depot or Walmart. However, be wary: 2025 could bring tax hikes. That’s when all of these changes—except for the corporate tax cuts—will expire, unless Congress chooses to renew them.
Lance Palmer, a financial-planning professor in the UGA College of Family and Consumer Sciences, offers advice on ways to use the extra money employees are taking home. He recommends using it to pay off credit card debt or putting it into a tax-free retirement or health savings account.