Debate over the Trump administration’s newly passed tax bill has reached a frenzy. Skeptics see it as a thinly-veiled handout to corporations at the expense of the middle and working class. Proponents see it as a much-needed stimulus to the economy at large.
But regardless of your opinion on trickle-down economics and corporate tax cuts, you’re probably much more concerned with one thing—how will this actually affect the average person?
As with anything tax related, the answer is a complicated one. If you’re curious how the new tax bill will change your financial circumstances, read ahead for the nitty gritty.
New changes to the tax code
Tax brackets changes
Overall, the new tax brackets will be lower than the current system. The highest tax bracket will be 37 percent, down from 39.6 percent for the 2017 fiscal year. Also, the income thresholds for the tax brackets have been loosened.
For example, married couples filing jointly who earn between $19,050-$77,400 will now be in the 12 percent tax bracket instead of the 15 percent. Overall, everyone will find themselves in a lower tax bracket in 2018.
Remember, when you file your taxes this year, you will still be using the 2017 income tax brackets. Check out this article for a full how-to guide to filing your taxes this year.
Standard deduction increase
There are two basic deductions that everyone qualifies for: The standard deduction or the itemized deduction. A deduction is an amount subtracted from your taxable income. The more deductions you can claim, the lower your taxable income and your overall tax liability.
The standard deduction is more common since it doesn’t require the taxpayer to keep track of any special receipts or expenses. However, the itemized deduction is popular with homeowners, who can only deduct mortgage interest when they itemize.
The new tax bill increased the standard deduction to $24,000 for married couples filing jointly, $18,000 for head of household and $12,000 for all other filers. Previously, married couples had a standard deduction of $12,700, and individuals had a $6,350 standard deduction.
This means that fewer people will itemize their taxes since the threshold is so much higher. A higher standard deduction may simplify tax time for many people, but it also could have serious repercussions for charitable organizations. Charitable contributions are only deductible if you itemize your taxes. Since fewer people will itemize, they may also decide to rescind or decrease their donations.
Repeal of personal exemptions
The new tax bill repealed all personal exemptions. A personal exemption is similar to the standard or itemized deduction—an amount an individual or married couple automatically deducts from their income. In 2017, the personal exemption was $4,050 per person. Children and dependents also qualified for a personal exemption that their parents could deduct on their taxes.
Experts say that the increased standard deduction will not make up for the removal of the personal exemption for large families of four kids or more. However, married couples with few or no kids will see a decrease in their taxable income if they take the standard deduction.
“The new tax laws will affect most people under 30 in a positive way; especially if you don’t have children or own an expensive home,” said Jason Howell, CFP®.
Other important changes
Changes for homeowners
Homeowners who have home equity loans will no longer be able to deduct interest on those loans. Previously, you could deduct up to $100,000 in interest.
Another major change is the cap on state, local, and property tax deductions. Individuals can only claim $10,000 for all three, which will impact homeowners who live in states with both high-income taxes and property taxes, such as New Jersey and Illinois.
Other changes include:
- Moving expenses are no longer deductible on your taxes. Previously, you could deduct all moving expenses if you moved for a job that was at least 50 miles farther than your previous commute.
- The deduction for tax preparation expenses is also scrapped. If you pay to have your taxes prepared by a professional, you won’t be able to deduct those expenses on your taxes.
- Alimony is no longer a tax issue. Now, people who receive or pay alimony won’t have to report it on their taxes. If you’re a divorcee who receives alimony every month, expect a nice boost on your taxes. If you pay alimony every month, you can no longer deduct it.
- The child tax credit was raised from $1,000 to $2,000 per child. The income threshold is also higher for parents who want to use this credit. Married couples filing jointly who earn up to $400,000 or individuals who earn $200,000 can take advantage of this deduction.
- The threshold for estate taxes doubles to almost $10 million from $5.49 million for individuals and from $11 million to $22 million for married couples. If you receive an inheritance of $9 million, you won’t have to pay any estate taxes on that amount.
- People will only be able to deduct property and casualty losses if they were sustained because of a federally-recognized disaster. If your house was burglarized, for example, you won’t be able to count those losses on your taxes. But if your house was destroyed because of Hurricane Irma, you can use this deduction.
How to adjust to the new tax bill
To see how your taxes will be affected, use one of the following calculators:
You should also consider hiring an accountant if you’re not sure how your tax bill will change. The more complicated your taxes, the more likely it is you’ll benefit from professional help.
Economist reactions to the tax bill are mixed, and it’s unclear how things will change once the dust clears. Millennials should remember that two important deductions—the student loan interest deduction and the qualified tuition deduction—are still intact. If you’re a grad student who was worried about having to pay taxes on your tuition reimbursement, rest easy. Anyone currently paying their student loans will still be able to deduct the interest on their taxes, even if they don’t itemize.