More than 30 years after tax reform last passed through Congress, the House and Senate voted today to pass their ‘reconciled’ tax reform bill. It’s now on to President Trump’s desk to officially become law.
Both the House and the Senate versions contained specific differences, but they have consolidated and made compromises to try to accommodate a lot of the proposed revisions. Simply Money Advisors wants to share the most relevant highlights with you:
Tax brackets
There will still be seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Here’s how those break down:
For individuals:
- 10% bracket: Up to $9,525
- 12% bracket: $9,525 up to $38,700
- 22% bracket: $38,700 up to $82,500
- 24% bracket: $82,500 up to $157,500
- 32% bracket: $157,500 up to $200,000
- 34% bracket: $200,000 up to $500,000
- 37% bracket: $500,000 and more of taxable income
For married couples:
- 10% bracket: up to $19,050
- 12% bracket: $19,050 to $77,400 taxable income
- 22% bracket: $77,400 up to $165,000 of taxable income
- 24% bracket: $165,000 up to $315,000 of taxable income
- 32% bracket: $315 up to $400,000 of taxable income
- 35% bracket: $400,000 to $600,000 of taxable income
- 37% bracket: over $600,000 of taxable income
With these rates, some of you may see reductions in taxes, but others may see increases depending on how much you make.
Plus, it’s important to remember that our tax system is still a ‘progressive’ one, meaning different levels of your income are taxed at different rates. So, your ‘effective’ tax rate will most likely end up lower than your respective bracket listed above.
Increase in standard deductions
Currently, the standard deduction is $6,350 for individuals and $12,700 for married couples.
The standard deduction will now be temporarily increased to $12,000 for individuals. For married couples, it would increase to $24,000 if filing jointly. ‘Personal exemptions’ will no longer exist.
About 70% of you already use the standard deduction as opposed to ‘itemizing.’ Some estimates say an increase in the standard deduction of this size 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.
The child tax credit will now be $2,000 for each child. If you don’t end up having any tax liability, you could get up to $1,400 given back to you in the form of a refundable credit. Also, taxpayers could reduce their tax bill up to $500 for dependents who are not children.
Decrease in the mortgage interest deduction
The current mortgage interest deduction limit for homeowners is $1 million of mortgage debt.
The mortgage interest deduction is now limited to $750,000 of mortgage debt for newly purchased homes (if you purchased your property before December 15, 2017, 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 most of you.
Home equity loan interest will no longer be deductible.
Limit on local property tax deductions
Currently, you’re generally allowed to deduct anything you pay in state and local income taxes, including property taxes. Now, you’ll be limited to deduct any combination of state and local taxes, property taxes, and sales tax that doesn’t exceed $10,000 total.
Medical expenses
The current medical expenses deduction is allowed for medicals expenses that exceed 10% of your adjusted gross income. This percentage would decrease to 7.5%.
Alimony deduction
Currently, alimony payments are tax-free. The recipient must pay a standard income tax on the money they receive. This helps keep more money in the family unit. This deduction is also in place to make the divorce process go faster.
Starting in 2019, alimony payments will no longer be deductible, and the person receiving the payments will no longer pay tax on the income.
529 college saving plans
Currently you can only use a 529 college savings plan for qualified college expenses.
Now, you’ll be allowed to use a 529 plan to pay for religious and private school and home schooling (up to $10,000 per child, per year from K-12).
Corporations get a tax cut
Corporations will see their tax rate permanently cut from 35% to 21%. 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 an increase in the value of those stocks.
The Simply Money Point
These changes won’t impact your 2017 taxes that are due on April 17, 2018. The most immediate effect is that many of you will see larger paychecks - probably in February 2018 - because less tax will be taken out.
Otherwise, you probably won’t notice most of these other changes until you file your 2018 taxes in 2019. Though it’s important to note that all changes impacting individuals, like you, will expire at the end of 2025.
Ultimately, the biggest winners of tax reform are corporations which get a permanent tax cut. So be a ‘shareholder’ by owning stock in your investment mix, assuming you can handle the risk. With the increase in corporate profits on the horizon, having stock will help you reach your financial goals and objectives.
And if you’re concerned your taxes will be impacted, Simply Money Advisors recommends meeting with your financial planner (preferably a Certified Financial Planner™) and a trusted tax professional. You want to make sure you have plenty of time to make any needed adjustments to your financial plan.