How the New Tax Bill Affects Individual Taxes
How the New Tax Bill Affects Individual Taxes
With the new tax bill, individuals will be affected just as much as businesses. Click here and find out how Trump's tax plan will affect your taxes.
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In 1789, Benjamin Franklin wrote, "...in this world, nothing is certain except death and taxes." His assessment is still true today!
No doubt Franklin would be surprised at our contemporary tax system. Like many Americans, he might find it illogical and complicated. In fact, 44% of contemporary Americans believe our tax system is too difficult to understand.
In an effort to simplify the tax code and provide tax relief, Congress passed the "Tax Cuts and Jobs Act" in December 2017. The new law represents the biggest change to the American tax code in over 30 years.
You may be wondering what these changes mean for you. How are you going to be affected by the new tax bill? In the article below, we'll find out.
The Trump Tax Bill: An Overview
The new tax plan is over 500 pages long and makes major changes to the tax code. It is impossible to list all of those changes here.
But some important features will affect just about everyone's 2018 tax return. We'll focus on those items below.
Tax Brackets Under the Trump Tax Bill
President Trump's original tax plan lowered the number of tax brackets from seven to four. In the end, though, the Trump tax plan that passed kept the seven brackets. What changed were the tax rates and their corresponding income levels.
For example, the top rate used to be 39.6%. With the new law, it drops down to 37%. For single individuals, it applies to income of at least $500,000, and for marrieds filing jointly, $600,000. The old income levels were $426,700 and $480,050, respectively.
The changes enacted are likely to save money for almost everyone. Even so, households with higher income levels will benefit more.
The highest benefits will be seen in households earning between $308,000 to $733,000, although households making more than $733,000 will see a $50,000 tax cut.
Compare that figure with the projected $900 tax cut for middle-income families. Or the zero liability change for about half of low-income households. Note, though, that many low-income households pay zero tax to begin with or receive refunds.
The Standard Deduction and Personal Exemptions
Trump's tax plan doubles the standard deduction. For a single filer, the number jumps from $6,350 to $12,000. For Married Filing Jointly, it is now $24,000, up from $12,700.
These increases make up for the loss of personal exemptions. Prior to 2018, each household member (including individuals, spouses, and dependents) could claim a $4,050 exemption. It was not subject to income tax. Personal exemptions lowered the household's total taxable income.
It's not clear what the effects of these two changes will have on your tax bill. For example, some families may end up paying higher taxes under the new tax bill. This is especially true if they have many children.
There is a second effect of increasing standard deductions. Fewer people will be itemizing their tax bill. Currently, about 70% of taxpayers claim the standard deduction. That figure will likely jump to 94%.
But these changes will have unintended consequences as well. For example, charitable contributions will no longer be tax deductible for many people since they won't be itemizing their tax bill.
Trump's tax overhauls many other deductions as well. Let's look at the most significant ones in the next section.
Trump's tax bill eliminated most deductions. Others were pared down. Everything from moving expenses to alimony payments was affected.
If you used to itemize your deductions, you'll need to know what changed. Then you'll be ready for the 2018 tax season.
In what follows, we'll go over some of the most significant of these changes.
This deduction remains intact. What's more, Trump's tax bill temporarily lowers the threshold for declaring it. Prior to the passage of his law, your medical expenses had to equal at least 10% of your total income for you to be able to declare them.
Now that number has been lowered to 7.5%. This change even applies to taxes filed for 2017, although it will expire after 2019. It is only applicable, then, to 2017 and 2018.
For this short time, though, it will be extremely helpful to lower-income families with high medical expenses. In 2015, more than 8.8 million people took this deduction, so obviously, high medical expenses are a financial concern for a large group of people.
State and Local Taxes
Trump's tax plan made big changes to state and local tax deductions. It allows you to deduct up to $10,000 in state and local taxes.
The $10,000 limit applies to both single filers as well as married filing jointly. Many people feel this change will hurt people who live in high-tax states.
The Act limits the deduction on mortgage interest. Before you could deduct interest on the first $1 million of debt. Now that figure will be limited to $750,000, although current mortgages will not be affected.
Only loans that were taken out after December 15, 2017, will be subject to the new threshold. These changes aren't likely to affect current homeowners but will obviously impact anyone buying or selling a home. The effect on the real estate market is as yet unclear.
Other deductions that the Trump tax bill eliminated are:
Casualty and theft losses (unless you are in a federally declared natural disaster area)
Tax Preparation Fees
Alimony Payments (although you can deduct alimony if you receive it)
Wrapping Up: New Tax Bill
The new tax bill was a sweeping overhaul of the American tax system. Some of the most important changes are listed above. This information is sure to be helpful to you as you prepare for filing your taxes in 2018.
If you have any questions about your upcoming tax bill or other financial matters, please feel to reach out to us or comment below. We know taxes can be confusing, and we are happy to help!