ELLSWORTH — Did you notice a few extra dollars in your paycheck this month? So did Marden’s.
The recently adopted Republican tax cuts may mean more money in your wallet. Maine’s own bargain bazaar is hoping you’ll pass along your good fortune and buy something.
Employees of Walmart and Camden National Bank got a lot more than a few extra dollars. As a result of the cut in the corporate tax rate, the bank gave one-time bonuses of $1,000 to all non-executive full-time employees and $750 to all part-time employees. Walmart also announced bonuses based on length of service, with employees who’ve been with the company 20 years or more eligible for $1,000, although it came under fire shortly after for its decision to close 63 Sam’s Clubs locations around the country. The company has said it will raise its minimum wage nationwide, from $9 to $11.
Most of the tax policy changes won’t go into effect until next year’s filing season. The slight pay bump seen by many employees in their paychecks last month is due to a change in the withholding tables, which help employers figure out how much money to take out each month to cover federal income taxes.
How much of an increase you’ll see depends on how many allowances and deductions you took when filling out your W4, but nearly everyone will see a slight upward nudge in 2018. The IRS has promised to release new W4s soon, and employees may need to revisit their forms.
Just under 6,500 federal tax returns were filed in Ellsworth in 2015, according to IRS data. A majority of filers paid between 10 and 25 percent in income tax, and three-quarters received a refund. Of the 6,500, 950 were eligible for a child tax credit, and 18 percent took advantage of the earned income tax credit.
Corporations will fare well under the new bill, and most local residents are likely to get more money back in 2019. Officially titled the Taxes and Jobs Act, the reform doubles the standard deduction, slashes the corporate tax rate, cuts income tax rates and eliminates personal exemptions. It doubles the child tax credit and caps the amount of state and local taxes people who itemize are able to deduct, and makes changes to write-offs for home equity loan interest, which will be deductible only if the money is used for home improvements.
Camden National Bank and Walmart are among several companies, including AT&T, Wells Fargo and American Airlines, that have announced bonuses and potential wage increases in what they say is a direct response to the cut in the corporate tax rate, from 35 percent to 21 percent. Certain smaller businesses, of which Ellsworth has many, also will be eligible for a 20 percent deduction of their net income.
But some are unimpressed.
“It’s a big price to pay for a short-term benefit,” said Ben Wootten of Ellsworth’s Bigelow Investment Advisors, formerly Wind River Capital Management, which manages investments for several local companies, including The Ellsworth American’s 401(k) program.
“They could have just cut everybody a $500 check and that would have been it.”
Wootten said he supports bringing the corporate tax rate in line with the rest of the world — Canada’s rate is 15 percent, Ireland’s is 12.5 — but he questions whether it will really result in reinvestment. He said corporations often raise wages only because they need to bring them in line with others in the industry.
“I’m skeptical,” Wootten said, adding that bonuses are generally “a one-time thing.”
“Most corporations only raise compensation rates when they have to because they’re losing people,” he said.
Wootten also noted the price tag for the tax reform. The Congressional Budget Office has estimated that it will add $1.4 trillion to the deficit over the next decade. This figure does not include economic growth, which Republican leaders in Congress have argued will pay for the plan.
Wootten worries there may be future cuts to programs such as Medicare and Social Security to pay for the programs.
David Hawkes, co-owner of Hawkes & Quirk LLC, said he thinks the shift in marginal tax rates and the increase in the standard deduction will likely have the greatest effect on local residents. Although tax brackets haven’t changed much, the marginal tax rate has gone down by around 3 percent in each bracket. For example, a single person making between $9,500 and $38,700 would be taxed at a rate of 12 percent rather than 15 percent under the new law.
Because the standard deduction has increased, from $6,350 to $12,000 for single filers and from $12,700 to $24,000 for married couples, this may mean that people who itemized in the past will be more likely to take the standard deduction instead.
Tax Reform 101
Tax season officially opened Jan. 29. Most of the changes to the tax code that were passed won’t take effect until next year, but residents should begin planning for filing in 2019 under the new guidelines. A few things to remember: several proposals were floated that didn’t make it into the final version. Student loan interest will still be deductible, as will medical expenses, and the alternative minimum tax is staying put. All seven income tax brackets are in place with few changes, but the marginal tax rate, i.e., the percentage of your income you pay in taxes, has changed for everyone.
Personal exemptions will be entirely eliminated beginning with next year’s tax season. The child tax credit is doubling, from $1,000 to $2,000. If you’re getting divorced, it would be best to finalize it in 2018. Next year, you won’t be able to deduct alimony payments (although you won’t be taxed if you receive them either).
There’s a difference between credits, exemptions and deductions. A credit is particularly valuable. It reduces your tax burden directly, rather than reducing your taxable income. If, for instance, you have one child and owe $3,000 in taxes, that amount could be reduced to $1,000 with the new tax credit.
Deductions and exemptions: both reduce taxable income. Certain deductions — deducting state and local taxes, for example — require that you itemize your taxes; others, such as interest on student loans and alimony payments, can be taken by someone who takes the standard deduction. Exemptions are similar in that they reduce your taxable income but have fewer restrictions. You can take them for your spouse, yourself and any dependents. The personal exemption is $4,050 in 2017, but will be eliminated next year.