First, some positive news.
Many households will see a reduction in their tax bills over the next few years under the GOP tax plan that President Trump is expected to sign into law soon.
According to the nonpartisan Joint Committee on Taxation, over half of filers earning $40,000 or more will experience an average tax cut exceeding $500 in 2019. This trend continues for income brackets over $50,000 through to 2025.
The Tax Institute at H&R Block provided examples illustrating that families with young children could potentially reduce their tax liabilities by approximately $2,000 or even more in the coming year.
However, there is a catch: all individual tax cuts are scheduled to expire after 2025, while corporate rate reductions will be made permanent under the legislation.
Consequently, by 2027, a significant number of individuals earning less than $200,000 may witness little to no change in their tax obligations or even an increase in their taxes compared to current levels, as per the JCT’s estimates.
Related: Explore the CNN tax calculator to determine your potential outcome under the GOP bill
The decision by Republicans to make individual tax cuts temporary was a strategic move to comply with budgetary regulations that allowed them to advance their tax overhaul without Democratic support.
Nonetheless, they assure that a future Congress is unlikely to allow middle-class tax cuts to expire. Historical precedents, such as the frequently extended Bush tax cuts, may lend some credence to this belief, but there is no definitive assurance. A lot can change within eight years.
In any event, there is another possibility that could lead to a tax increase after 2025.
While the cuts are temporary, the GOP tax bill permanently implements a provision described by tax expert Lily Batchelder as a “stealth tax increase” for individuals, the impact of which will intensify over time.
According to Batchelder, a tax law professor at New York University, the revenue generated from this provision is one of the main justifications for financing the permanent corporate tax reductions in the subsequent decade.
Related: Key components of the final GOP tax plan
The GOP framework introduces a new, slower inflation metric known as chained CPI, which will be applied to parts of the tax code that are adjusted for inflation. For instance, the income brackets corresponding to each of the seven tax rates will increase at a slower pace, as will the values of many tax credits and the income thresholds that determine eligibility for various tax benefits.
The bottom line for taxpayers is this: Many tax benefits, as noted by Batchelder, “will gradually lose value compared to current law, causing taxpayers to be pushed into higher tax brackets over time.”
CNNMoney (New York)
First published December 20, 2017: 4:54 PM ET
