One of the big promises President Trump made during the presidential campaign was to cut and reform taxes. Today, the House Ways and Means Committee released the details of its tax reform bill. And there are a lot of details – 429 pages of details, to be exact.
So what does this tax reform bill mean to you and your personalized financial plan? Simply Money Advisors shares the highlights we think you’ll find most relevant:
Simplified tax brackets
The tax reform bill proposes a reduction to the number of tax brackets (7 down to 4): 12%, 25%, 35%, and 39.6%. Here’s how those break down:
- 12% bracket: up to $45,000 of taxable income
- 25% bracket: $45,000 to $200,000 of taxable income
- 35% bracket: $200,000 to $500,000 of taxable income
- 39.6% bracket: $500,000 and more of taxable income
For married couples:
- 12% bracket: up to $90,000 of taxable income
- 25% bracket: $90,000 to $260,000 of taxable income
- 35% bracket: $260,000 to $1 million of taxable income
- 39.6% bracket: $1 million or more of taxable income
Just understand that the simplification of the tax brackets may not actually reduce taxes in some case. Some of you may see reductions in taxes, but others may see increases.
For instance, some Americans with lower incomes will likely see reductions in their taxes, but others may pay more. For many upper-income households, they could face a higher marginal tax rate because they could get pushed from their current 33% bracket into the new 35% bracket.
Increase in standard deductions
Currently, the standard deduction is $6,350 for individuals. This would be increased to $12,200. For married couples, it would increase from $12,700 to $24,400.
About 70% of you already use the standard deduction as opposed to “itemizing.” Some estimates say that this increase in the standard deduction would mean about half of you who currently itemize would end up taking the standard deduction instead. If this is you, this could make your tax filing more simplified and streamlined.
Increase in child tax credit
Currently, parents receive $1,000 for each child. This tax bill would increase that to $1,600 for each child with a $300 credit to each parent to help take care of expenses.
Decrease in the mortgage interest deduction
The current mortgage interest deduction limit for homeowners is $1 million of mortgage debt. This bill would now cap the mortgage interest deduction at $500,000 of mortgage debt for newly purchased homes (if you already own your home, you’re grandfathered in to the old rules). Just note, however, that the increase in the standard deduction would make the mortgage interest deduction less valuable for a majority of you.
A limit on local property tax deductions
The bill would limit state and local property tax deductions to $10,000.
No 401(k) changes
There had been talks about changing the 401(k) contribution rules. Generally speaking, the government was considering “Rothifying” the majority of your contributions. This would have meant you would have paid taxes now instead of in retirement when you took distributions from your account. At this time, this will not be a part of the tax reform bill, but that could change in the future.
Corporations get a tax cut
The proposal would cut taxes for corporations from 35% to 20%. This could be good news for you and your investment mix. Typically, if there is a decrease in taxes for corporations there is an increase in profits. Therefore, if you own stocks, you could see increases in stock prices.
The Simply Money Point
It’s important to keep in mind that today’s tax reform bill is just one step in the process – the final version of what’s passed will most likely be different. But in its current form, corporations look to be the big winners. If you want to get a piece of their good fortune (and are willing to accept the risk), it’s critical to own a piece of companies by owning stocks.
And if you’re concerned your taxes will be impacted by whatever form tax reform takes, Simply Money Advisors recommends meeting with your financial planner (preferably a Certified Financial Planner™) and a tax professional. You want to make sure you have plenty of time to make any needed adjustments to your financial plan.
To see if you’re on track for retirement, download our free guide, “How to Prepare for Retirement.”