“Starving the Beast.”

 in CU News by (updated 2400 days ago)

Tax Cuts and Jobs Act

Effect on Credit Unions and their Members.

Congress passed the Tax Cuts and Jobs Act in December 2017. It you’re a Republican congressman you probably voted for this. If you’re a Democrat, you most definitely voted against it. (In fact, not a single Democrat voted for it).

It’s now the law so my question is, how will this affect Credit Unions, Credit Union members and me. Since no one seems to know the answers to these question, I thought I’d do a little research.

Here’s what I now know for sure:

  • The conservatives’ purpose for the bill, as Forbes pointed out recently, is to “Starve the Beast.” Our government will most likely collect less taxes unless the economy is so stimulated by the tax cuts that everyone starts making more money and everyone starts paying more in taxes (Even though the percentage they’re paying is less). That’d be nice and is what we are all hoping for.
  • If the economy isn’t stimulated enough to cover the short-fall, we’ll have to cut spending (“Starving the Beast.”) Conservatives love this. Liberals are worried that Republicans may cut too much and may actually try to overhaul the entitlement programs such as Medicare and Social Security. Most everyone worries, except many in congress, about the deficit ballooning out of control, if congress can’t control spending. Hmm…I’m a little worried about this as well.
  • Finally, the main reason for the bill appears to be cutting Corporate Taxes. President Trump says this will make our corporations healthier and encourage them to be more likely to stay headquartered in the United States…and since most Corporations are headed by good American citizens, they’ll pass this savings on to their employees in better wages and to their customers in more fair prices. (At least, that’s what I’m hoping for).

How does this affect us regular folk?

  • Most changes take effect January 1, 2018.
  • Personal tax rates drop as follows
    • 10% to 10%
    • 15% to 12%
    • 25% to 22%
    • 28% to 24%
    • 33% to 32%
    • 35% to 35%
    • 6% to 37%
  • Standard deduction increase but many other deductions have been limited or reduced.
    • The standard deduction increases to $24,000 (from $12,700) for married individuals filing a joint return. To $12,000 (from 6,350) for singles.
    • Beginning January 1, 2018 interest on a home equity loan is no longer deductible.
      • Historically borrowers could deduct home equity interest on loans up to $100,000 ($50,000 for married people filing separately.
      • There is no grandfathering. It is gone now!
    • Homebuyer can only deduct interest on the first $750,000 of mortgage debt on a newly purchase home. This deduction is available on their 1st and 2nd homes only. There is no deductibility on 3rd or 4th
    • The Alimony deduction is eliminated on orders after December 31, 2018. (No change for court orders before that date).
    • The Health Care penalty is eliminated beginning January 2019.
    • Personal and dependent exemptions are suspended.
    • Child tax credit increased from $1000 to $2000 through 2025.
    • Charitable deductions are deductible up to 60% if you itemize.

Summary for Credit Union Member

It appears that for us regular folk, most of us will get a small tax cut. (Especially if you don’t itemize). For others that itemize, they may see a small increase. On the other hand, it probably won’t change our world much.

  • Less taxpayers will have reasons to itemize.
  • It’ll be difficult to find more deductions than the new higher standard deduction.

If you’re a corporation. You’ll soon be loving life.

  • Corporate Tax Rate is lowered from 35% to 21% although this is offset some by reduction and/or elimination of some business deductions.

Primary Effect on Credit Unions

Losing interest deductibility on Home Equity loans is a big deal. Some issues:

  • Even without the interest deduction, home equity loans is still one of the cheapest ways to borrow money. However, losing the tax deductability will make the product less attractive.
  • Home Equity loans have gotten members in a lot of trouble in the past. Maybe with the change borrowers will borrow less against their houses.
  • Home Equity loans have become very popular lately since many members have locked into low interest 1st mortgage loans. They may be more inclined to refinance their first mortgage rather than using a Home Equity Loan.
  • The loss of interest deduction for Home Equity loans and the cap on 1st mortgage loans could put some downward pressure on housing prices.

Other Information

For more fun you can read the bill at https://www.congress.gov/bill/115th-congress/house-bill/1

You can also read what a local CPA firm thinks about the bill at Anderson Bradshaw’s http://abcpas.net/blog.php (Anderson Bradshaw LLC does taxes for members of one of our clients, Hercules Credit Union).

With these changes and with the cost of Turbo Tax going up, this may be the year you to have the professionals prepare your return and help you plan to lower your taxes for next year.

Have fun and good luck.