The U.S. has one of the lowest tax burdens of any developed country – and President Trump’s tax reform may push that figure even lower, according to research by international accounting network UHY, which studied 34 countries worldwide to calculate how much of each country’s GDP is taken by the government in tax.
According to the findings, the U.S. has a tax burden of 22 percent of gross domestic product, a third lower than the Group of Seven nations’ average of 31.1 percent (the G7 also includes the U.K., France, Germany, Italy, Canada and Japan). The U.S. government’s rate of tax take is more on a par with emerging economies of Brazil, Russia, India and China.
The U.S. government’s tax take is lower than the average global rate of 28.2 percent and lower than the average in Europe (43.3 percent), UHY analysis showed – and could fall further in the coming years as some commentators claim that President Trump’s recent tax plan could trim as much as $2 trillion off U.S. government tax revenues.
“The president’s recent tax cuts … are designed to help sharpen competitive advantage,” said Rick David of UHY Advisors in the U.S. in a statement. “Today, the U.S. tax position is looking compelling for many businesses compared to the rest of the G7. The U.S. government wants to create an environment for businesses to grow and reducing the tax burden will help create a solid foundation for that.”
Generally, European economies dominated the top of UHY’s table of the highest taxes, with an average tax burden of 43.3 percent. Denmark topped the rankings with the government’s tax take representing 53.5 percent of total GDP.
Emerging economies in general have seen much lower levels of government tax take, including many in the Association of Southeast Asian Nations trading bloc, such as Malaysia (16.5 percent) and the Philippines (13.9 percent).
President Donald Trump’s new tax law set off a false alarm for homeowners planning to borrow against the equity in their houses.
The legislation signed by Trump in December appeared to eliminate the deduction taxpayers get for the interest owed on home-equity loans, spooking the home remodeling industry whose customers often rely on the loans for projects. But after prodding from lobbying groups, the Internal Revenue Service clarified that borrowers could still use the deduction, as long as it’s for home improvements.
The IRS guidance on home-equity debt is just the latest example of the agency’s cleanup effort in the wake of the hastily passed law. Various industries and tax professionals are still struggling to understand its provisions and interpret lawmakers’ intentions on changes including the pass-through deduction and international tax measures.
Homes in an aerial photograph taken above New JerseyCraig Warga/Bloomberg
Since the end of last year, the agency has issued press releases specifying that hedge fund managers can’t circumvent new carried interest rules with “S” corporations and that homeowners can deduct prepaid property taxes only in some instances.
Until the IRS statement late last month about the home-equity deduction, some housing groups including executives at the National Association of Home Builders said they didn’t think it was clear the home-equity deduction had survived, at least in part.
The NAHB sent Treasury Secretary Steven Mnuchin a letter at the end of January arguing that the tax law, as written, should allow interest from home-equity loans and home-equity lines of credit to be deducted as long as the homeowner used the money for home improvements. They said their interpretation was backed up by long-accepted standards in the tax code.
“As most major remodeling projects are financed using debt secured by the buyer’s home, the deductibility of interest paid on loans used to substantially improve a home is the lifeblood of the industry,” the letter said.
Eric Smith, an IRS spokesman, said the news release came in response to multiple inquiries rather than from a specific group. He said the statement clarified what the law already said rather than made new rules.
Robert Criner, a remodeler in Newport News, Virginia, said that after the law passed, he thought the deduction for home-equity loans and for so-called HELOCs was dead. The ability to deduct HELOC interest is a deciding factor for some homeowners on how big a project to undertake or whether to do a remodel at all, according to Criner.
Throughout the tax-bill process “people were waiting to pull the trigger,” said Criner, which he attributed to the HELOC issue and to broader confusion about the bill. Criner said even after the IRS clarification, only about half of his customers realize that they can still deduct the interest.
The confusion stemmed from the law saying it was eliminating interest for “home-equity indebtedness.” Some borrowers, remodelers and others in the lending industry interpreted that as any kind of home-equity loan that taps equity to provide cash. But the tax code has long defined home-equity indebtedness as any kind of debt except loans taken out to acquire, construct or substantially improve a taxpayer’s residence.
So if a borrower uses the loan to build a new bathroom, it would qualify for the deduction, but if it’s used to consolidate credit card debt, it wouldn’t qualify, according to the IRS’s clarification.
In January, LendEDU, a comparison website for consumer financial products, surveyed 1,000 Americans who were home-equity loan borrowers, about half of whom said they used the money for home improvement. The company wanted to measure how aware they were that the new law limited home-equity deductibility.
The problem: None of the survey’s answers were correct. LendEDU falsely believed the new law completely killed the home-equity interest deduction, and the survey results were reported in several mainstream and industry publications.
LendEDU CEO Nate Matherson said the company would put a clarification at the top of the survey. Noting that the IRS hadn’t yet issued its guidance at the time of the survey, Matherson said, “At the time the survey was conducted, the methodology was accurate.”
The NAHB, a lobbying group that represents small home builders, believed it had a good case but still wasn’t completely sure that the IRS would agree with its interpretation, said David Logan, the association’s director of tax and trade policy analysis.
The home-equity interest deduction wasn’t a focus for the group last year when it was lobbying lawmakers on its bigger concerns with the bill — such as the doubling of the standard deduction. Still, once the law came out, there was concern that eliminating home-equity interest deductions would have a “massive detrimental effect on remodelers,” Logan said.
When the IRS agreed with the NAHB’s interpretation, Logan said the group’s remodelers were “exuberant.”
Earlier this year Jay Charles’s twice-a-month paycheck jumped by $65, a result of the new U.S. law that cuts taxes almost $1.5 trillion over the next decade. Then he did the math.
It turns out Charles, a 48-year-old software developer in Blythewood, South Carolina, may not get a tax cut at all. He and his wife don’t have children and won’t be able to benefit from an enhanced child tax credit—and they’ll be losing some benefits including unlimited state and local tax deductions. An online calculator showed Charles he’ll break even, and his wife, a professor who files separately, will probably see a tax increase.
For many Americans, the most noticeable effect of the tax law so far is a jump in their take-home pay. After the law passed, the Internal Revenue Service issued new withholding tables, directing employers to adjust how much tax money they take from workers’ paychecks starting in February. Those withholding amounts are effectively a guess at what employees’ tax liabilities will be for 2018.
Some taxpayers are finding the tables are a blunt tool. When 2018 taxes are due in April 2019, millions of Americans could find themselves owing the government far more than was withheld. Millions of others could find they paid too much in 2018, resulting in unusually large refunds. Which category you fall in could come down to whether you have any dependents and how old they are, if you itemize deductions, and whether you’re a two-income family.
In the meantime, the tax withholding amounts could have political consequences. Control of Congress is at stake in November’s elections, and the tax law is on track to become a top issue. Voters’ opinions may depend on whether they think they’re personally getting a fair share of benefits from the law signed by President Donald Trump in December.
Withholding is based on W-4 forms, typically filled out by workers when they start a job and rarely adjusted afterward. After the tax overhaul made parts of the old W-4 obsolete, the Treasury Department and the IRS issued a new form on Feb. 28, and unveiled an online calculator to help workers get their withholding right. Workers won’t be required to submit new W-4s, however, and many are unlikely to bother.
“This year it’s more critical than ever for all taxpayers to assess their personal situation, to make sure they have withholding at the right level,” said Stephen Dombroski, senior payroll tax compliance manager at payroll company Paychex Inc.
The taxpayers most likely to get a nasty surprise when filing taxes next year are those who have typically itemized on their returns and claimed large deductions. That’s especially true if those deductions were for state and local taxes, which are limited to $10,000 by the law, or for unreimbursed employee expenses, which are eliminated entirely. The IRS also urges couples with two incomes, workers with multiple jobs, and taxpayers with lots of dependents to re-check their W-4s.
The bottom line: The more complicated your situation, the more likely your withholding is out of whack, in positive or negative ways.
Take, for example, a double-income couple with two teenagers living in California, one of the high-tax states where SALT deduction limits could throw off withholding calculations. They earn a combined $300,000 and deducted $29,000 in SALT, $16,000 in mortgage interest, and $7,000 in charitable contributions on their 2017 tax return.
Though this family gets hurt by the SALT limit, they benefit from changes to the alternative minimum tax, or AMT. Under the old withholding rules—under which the family withheld a relatively high amount, claiming no personal allowances—they’d still end up writing a check of almost $4,000 to the IRS each year, because they were hit by $6,500 in extra taxes from the AMT.
In 2018, the new withholding tables should boost this family’s take-home pay by $8,426, according to estimates by the Tax Institute at H&R Block—a noticeable $702 more per month. They also no longer need to worry about the AMT, which was sharply limited, though not eliminated, by the new law.
Their final bill next April, however, could vary widely based on a factor not reflected on their old W-4s and also unrelated to the SALT and AMT changes—the age of their children.
The former W-4 counted all dependents equally, reflecting a $4,050 personal exemption for every person on a tax return, from toddlers to college-age kids and elderly relatives. The tax revamp eliminated personal exemptions, so the new W-4 must make distinctions between children under the age of 17, who are eligible for an increased $2,000 tax credit, and other dependents who only get a $500 credit. For withholding purposes, then, a child is worth four times the value of other dependents. The law also made the child tax credit available to more upper-income taxpayers.
If the California family’s children are 15 and 16 years old, H&R Block estimates, they’ll get to April and find they owe the IRS $2,758, 30 percent less than last year. However, if their kids are 17 and 18—ineligible for the child tax credit—they’ll need to write a check for $5,773, almost 50 percent more than last year. They’ll even need to pay the IRS a small underpayment penalty of $15.
The vast majority of U.S. workers will see some tax cut as a result of the law, at least initially. Though the law’s benefits for individuals fade over time, 65 percent of American households can expect a tax cut in 2018 and 6.3 percent will see a tax hike, according to estimates from the Tax Policy Center.
Democrats deride the law, which they’ve branded the “tax scam,” as a giveaway to the wealthy and corporations that offers relatively small, temporary benefits to middle-income taxpayers. In a January letter to the IRS, top congressional Democrats raised concerns that the IRS’s withholding tables might be intentionally skewed to boost workers’ pay now and leave them owing money in 2019, after the midterm elections.
Treasury Secretary Steven Mnuchin said worries about political motives were “ridiculous.” In a letter obtained by Bloomberg News to Senator Ron Wyden, an Oregon Democrat, the IRS said it would “help workers ensure they are not having too much or too little withholding taken out of their pay.”
There’s no evidence that the IRS’s new withholding tables boost paychecks overall by more than they should to reflect the new law. The IRS acknowledges, however, that for individual taxpayers, paychecks could end up being a poor guide to how they’ll ultimately fare under the new law.
Mnuchin encouraged taxpayers to use the withholding calculator unveiled last week. “The majority of Americans don’t need to do anything, but we always encourage people to have the ability to check their specific situation,” he said.
For many taxpayers in more complex situations, however, the online calculator might not work. The IRS warns that self-employed taxpayers, people with capital gains and dividends, and others might need to wait for more guidance, expected from the agency in “early spring.” In the meantime, they may need to pay a tax adviser to determine their best withholding strategy for 2018.
When Charles realized his situation, he said he adjusted his withholding to erase the boost to his paycheck. He’s not a fan of the new law, which he worries is going to spike the national debt. The windfall from the tax code changes, he said, “is going to fall on a lot of wealthy people and corporations, and none of it is going to me.”
States may receive a major boost in their corporate tax revenues as a result of the Tax Cuts and Jobs Act, according to a new report.
The report, prepared by EY’s Quantitative Economics and Statistics unit on behalf of the Council On State Taxation’s State Tax Research Institute estimates the nationwide overall increase in state corporate income tax bases is 12 percent over the next 10 years, although it predicts significant variations between the states by year. The report estimates the average expansion in the state corporate tax base to be 8 percent from 2018 through 2022, increasing to 13.5 percent for 2022 through 2027.
The growing increase in later years is mainly thanks to the impact of research and experimentation expense amortization starting in 2022 and the change in the interest limitation that same year.
Another important factor behind the projected increase in corporate tax revenue is because states usually conform to federal provisions that broaden the corporate tax base, but not to provisions that reduce corporate tax rates. The magnitude of increased corporate tax collections for each state will depend on how it chooses to conform to the changes in the federal tax code from the new law, the composition of its economy, and the way in which specific provisions within the Tax Cuts and Jobs Act are implemented at the federal level. In some “rolling conformity states,” which conform directly to the federal tax code as it is amended, the changes in the TCJA are already part of that state’s tax law. In others, known as “fixed” or “static conformity states,” the changes from the new tax law will only be incorporated when the state’s legislature enacts legislation to conform.
“This analysis provides estimates of the potential magnitude of the state corporate tax base expansions that could occur with state conformity to provisions of the TCJA,” said EY principal Andrew Phillips in a statement.
The states that are expected to get the greatest estimated percentage change in state corporate tax base from the new tax law are mainly those that tax certain types of foreign income. The impact will also vary by industry based on the tax and financial profiles of companies in each industry sector. The study estimates the change in the state corporate tax base expansion by sector: manufacturing: (12 percent), capital intensive services (17 percent), labor intensive services (9 percent), finance and holding companies (8 percent) and other industries (13 percent).
Pennsylvania and Vermont are expected to see the largest increase, at 14 percent, in the estimated percentage change in the state corporate tax base from the Tax Cuts and Jobs Act, according to the report. The state with the lowest estimated boost, of 4 percent, is Mississippi.