How the new tax law will affect Vermonters

Andy Robinson is the sole proprietor of a consulting business in Vermont.

Robinson has concerns about the new federal tax law. The Plainfield resident worried about economic inequity that could result from it. Robinson, who consults with nonprofits across the country, has also heard from clients who are concerned that changes to charitable deductions may hit them financially.

As to what the new tax code means for him personally? Robinson said he needs to check in with his accountant. "I don't know yet," he said.

Robinson is one of several local Vermont business owners who told VTDigger that they aren't sure what impact the tax law changes will have on their income taxes.

Business ownership is just one of many factors that will affect how tax bills change for different people under the new federal tax law passed by Congress and signed into law by President Donald Trump in December.

Analysis of how taxes will change for people in six different scenarios by Davis & Hodgdon Associates CPAs found that most Vermonters are likely to see their federal taxes go down next year — the first year the full tax package is in effect. However, some may see their state taxes go up.

John Davis, an accountant with the firm, said he did not expect to see federal taxes go down for people across such a wide spectrum of situations.

"This one kind of surprised me," he said.

However, he observed that several of the changes "kind of offset each other" — such as nearly doubling the standard deduction, lowering tax rates across brackets, increasing the tax credit and more.

"Between the combination of those, somewhat surprisingly, we're still ending up with a lower tax for some of these people," Davis said.

Meanwhile, the scenarios find that in some cases, Vermonters may see their state tax bill go up because of the federal changes. Economists released estimates this week predicting the state will see a boost of $30 million the next fiscal year as a result of the federal changes.

Tom Kavet, the economist for the Vermont Legislature, generated two charts that break down the winners and losers. The group that has a greater than 50 percent chance of paying more in state taxes has adjusted gross incomes of $100,000 to $500,000 per year, Kavet's charts show. Taxpayers who earn $1 million plus are more likely to see a reduction in taxes. Only 80 out of 1,000 people who have incomes of over $10 million a year would get a tax break of $10,518 from the state of Vermont. The majority of taxpayers with adjusted gross incomes of $50,000 or less would also pay less in taxes.

One major factor that will determine how much of a tax break households get is whether they own a business, according to projections from Davis and Hodgdon.

The federal law lowers the tax rate for so-called "pass-through" income — in many small businesses, profits "pass through" to the owner's tax returns, and are taxed at their income rate.

Under the new law, small business owners will be able to pay tax on some of that income at 20 percent. That could present many proprietors of small businesses with an opportunity to claim a lower tax rate.

The federal law also lowered the top corporate income tax rate, from 35 percent to 21 percent.

Some small businesses and partnerships may want to consider whether to convert their business to a different classification in order to get more tax benefits.

S corporations, for instance, file taxes through individuals' tax returns. C corporations pay their own taxes. For some business partnerships or S corporations, tax rates under the new federal law may be more beneficial to them if they reorganize as a C corporation.

Businesses that wish to make the switch for the first year the tax bill is in effect will have to file for that change by a deadline in March, according to Davis.

Davis and Jeff Biesadecki, also of Davis & Hodgdon, ran the numbers on the following scenarios to see how different households will fare under the new law.

Though the law has been signed, there remains some uncertainty about how the numbers will shake out. Tax software is still being updated to reflect the changes in the law, they said. More changes could be forthcoming as the Internal Revenue Service develops guidance based on the law.

Scenario 1: Married couple, two kids, own a business and a home

In this case, a married couple with a home and two kids makes a total of $300,000 a year. The family owns a small business, which generates about $175,000 of income that passes through to their taxes. The family will be able to claim a 20 percent business deduction of 35 percent on that income under the new federal law.

In the past they've taken deductions for state and local taxes, mortgage interest, charitable contributions and personal exemptions. However, under the new law, they'll opt to take the standard deduction of $24,000.

The tax law changes mean that their federal tax rate will drop from 20.3 percent to 16 percent. Their federal taxes will be $18,403 less under the new law than they were under the old.

Although their Vermont tax rate will increase slightly from 5.7 percent to 5.8 percent, they will actually see their state taxes decrease by $1,796. According to Davis and Hodgdon, that is because their total Vermont taxable income will decrease due to changes in the federal law.

Scenario 2: Married couple, two kids, own a home, no business

In this case, a married couple with a home and two kids also makes a total of $300,000 a year, but they do not own a business. This family also used to itemize deductions, as with the family in the first scenario, but they will opt for the standard deduction under the new law.

This family will also see their federal taxes go down, from a rate of 20.4 percent to 17.1 percent for a total savings of $10,003.

However, their total Vermont taxable income will increase under the new federal law. So will their Vermont state tax rate, from 5.7 percent to 6.1 percent. Their state tax bill will increase by $1,284.

Scenario 3: Single person, owns home, no children, no business

In this case, a single individual earns $125,000 from an employer, who owns a home and does not have any children. The individual does not have a business and does not take the standard deduction.

This person's federal tax rate will drop from 17.4 percent to 16.1 percent under the new law, a reduction in their federal tax bill of $1,691.

As a result of the federal level changes, they will see the amount they pay in Vermont state taxes increase. Their rate will go up from 5.1 percent to 5.3 percent an increase in their situation of $323.

Scenario 4: Single person, rents their home, no children, no business

In this case, a single person earns $75,000. The individual rents his or her home and they do not have a small business. They also do not have children.

This person took the standard deduction in past years, and will do so again under the new law.

Their federal tax rate will decrease from 15.7 percent to 13.1 percent, for a savings of $1,948. State taxes will also decrease from 4.2 percent to 3.1 percent for a savings of $92.

Scenario 5: Couple, no children, own a home and a business

In this case, a couple earns a total of $125,000 who own a home. One partner is employed, the other earns $75,000 from his or her small business. The couple can take a business deduction of $15,000 because of that income.

Under the old law, they deducted mortgage interest, charitable contributions and more. Under the new law, they'll opt to take the standard deduction.

In this case, they'll see both their federal and state taxes go down.

Their federal taxes will drop by $4,490, as their tax rate decreases from 12.2 percent to 9.8 percent. Their state tax rate will also go down — from 4.1 percent to 3.5 percent — for a savings of $1,374.

Scenario 6: Couple, small business

The couple in this case makes $75,000. Of that income, $35,000 comes from a business of which one person is the sole proprietor. They'll be able to deduct $7,000 as business income.

This household, which has and will continue to take the standard deduction, will see their federal tax rate drop from 9 percent to 7.2 percent. The total savings will be $1,832.

Their state taxes will go down by $366, as their rate drops from 2.5 percent to 2.3 percent.


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