There has been a great deal of conversation and writing on the new tax bill, and its effect on individuals and families. Some have spoken about it being as consequential as the 1986 tax reform bill (which dramatically changed the tax landscape right as I was graduating from college). I wanted to take the time to discuss some key points, and then to provide some links for deeper analysis if folks are interested in “getting in the weeds”
The biggest part of this tax reform, in my opinion, was the dropping of the business tax rate from 35% to 21%. While this won’t affect folks in the FIRE community directly (for the most part) it will have a dramatic effect on the country and its business climate. States in the US have been dropping their own business taxes for the last decade, in an attempt to be more competitive and to bring businesses into their states. Now the US federal government has clued in that its 35% rate (vs a typical 20% rate for most of the developed world) has been seriously impeding the maintenance of business in the US.
What this will do, in my opinion, is lead to more business and job growth in the US, as companies evaluate their costs to offshore (cheaper labor, more transportation expense, higher inventories due to longer lead times, etc.) versus keeping some or all of the business in the US. I’m in the logistics industry, and I know the cost of shipping stuff by boat from China/Vietnam/Europe – and it is significant. If you live outside the US, be prepared for your companies to get additional business pressure due to this.
For folks in the FIRE community working on hitting their goal, this should translate eventually into higher wages and benefits, as companies grow, and the competition for labor (especially skilled labor) increases. I’m already seeing this in the logistics industry, and typical warehouse workers & forklift operators have seen their starting wages rise by 20% over the last 2 years. Competition for these folks is tight, especially in key markets (So. Cal, Northeast PA, etc.)
For individuals, the rates for FIRE folks have remained at 10% for the first bit of money, but the individual rates have dropped 2% – 3% for all levels beyond that. It should result in some tax savings. One of the key items is the increase of the standard deduction to $24,000 for couples, with the exclusion of the individual deduction. This will dramatically change how some folks do their taxes, specifically those who itemize.
- For those families in the lowest income level (under $44,050) the 10% rate didn’t go down, but the standard deduction raise to $24K may cut their taxes somewhat.
- For the next level, those married couples claiming income up to $96,400, the 15% rate dropped to 12%, so there are savings there.
- Those with higher income levels saw reductions of 2% – 4% in their tax rates.
The cap/elimination of some property tax deductions, state income tax and mortgage will cause a lot of heartburn in high-tax/high cost-of-living states (CA, NJ, NY, and Northeast US). I live in New Jersey, and it looks like it will definitely cause issues here. Still, the folks affected by this are the typical big-house/expensive car kind of people, not the FIRE-type of folks who want to save money and get out of the rat race.
For Mrs. 39 Months and I, our deductions for next year (including the soon-to-be-extinct personal exemption) look like they were going to be around $23K, so the $24K standard deduction appears to be where we would end up, saving us a little. The reduction in rates looks like it will save us $2K – $3K a year i total taxes.
If you’d like to see how it might affect you, there is a good Tax reform calculator at CalcXML.
Some further analysis:
- Go Curry Cracker: Good general analysis
- Nerd’s Eye View: Great In-depth analysis
- Physician on Fire: How self-employed are affected:
So what are your thoughts on the new tax reform, and how will it affect you?
Mr. 39 Months