Published February 15, 2018
How the New Tax Law May Affect You Now – And Later
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The long anticipated tax reform legislation passed into law and signed by President Trump in December is the most sweeping change to the U.S. tax code in several decades. If you’re wondering how the new law will affect you, you’re not alone. Everyone from retirees to financial planners to the IRS is scrambling to understand the provisions of the Tax Cuts and Jobs Act.
Experts agree that most Americans will receive a tax cut as a result of the new law. But it is worth noting that for technical reasons the law’s provisions affecting individuals and families will expire in 2025 and would have to be extended by a future Congress. Most of the law that pertains to businesses is permanent. The bipartisan Joint Committee on Taxation notes that while many Americans will pay less in taxes initially, unless the individual cuts are extended, more than half of taxpayers will be paying more by 2027. The Committee also estimates that over the next decade the new law will add $1.4 trillion to the national debt; that number could go much higher if the individual tax cuts are not extended beyond 2025.
Debate is likely to continue as to the long term impact on the U.S. economy, but there is little doubt that the new law will affect virtually everyone to some degree.
The new law also makes numerous revisions to the ways corporations and business owners are taxed, including a variety of tax cuts. But for purposes of this white paper, we will focus primarily on the law’s impact on consumers.
- Highlights of the new law include:
- Lowering the income tax rates for most households.
- Increasing the standard deductions.
- Eliminating personal exemptions.
- Putting a cap on state and local tax deductions.
- Further restricting the amount of mortgage interest that can be deducted.
- Eliminating the mandate to buy health insurance.
- Creating 20 percent deduction for pass-through businesses.
INDIVIDUAL TAX RATES
The new law lowers the income tax rates for all households, with the exception of a small group of high-earners whose income taxes will actually go up. There will still be seven tax brackets, but four of them have changed:
|
Old Rate 10% 15% 25% 28% 33% 35% 39.6% |
New Rate 10% 12% 22% 24% 32% 35% 37% |
The 2018 rates and corresponding income brackets will be:
|
Rate 10% 12% 22% 24% 32% 35% 37% |
Individual Filer Income $0 – 9,525 $9,526 — 38,700 $38,701 – 82,500 $82,501 – 157,500 $157,501 – 200,000 $200,001 – 500,000 $500,001 + |
Joint Filer Income $0 – 19,050 $19,051 — 77,400 $77,401 – 165,000 $165,001 – 315,000 $315,001 – 400,000 $400,001 – 600,000 $600,001 + |
Everyone needs to be aware of the new brackets so as to avoid being bumped into a higher bracket and plan accordingly. That could be especially worrisome for retirees when the mandatory distributions they must take when turning 70 ½ are added to their other sources of income.
New Tax Withholding Tables: In January the IRS issued new tax withholding tables that take into account the new tax rates and brackets, as well as the increase in the standard deductions and changes to personal exemptions. The new guidelines were to be implemented by mid-February. For people wanting to determine if they should make revisions to their withholding claims, the IRS is updating its tax withholding calculator and hopes to have it revised by March 1.
Standard Deduction and Personal Exemption: One of the biggest changes affecting how people file their income taxes is the significant increase to the standard deduction. In 2018 the standard deduction will nearly double, going from $6,350 to $12,000 for individuals and from $12,700 to $24,000 for married couples filing jointly.
The net result is expected to be a sharp drop in filings that itemize deductions because the standard deduction will be higher than what a lot of filers would have gotten by itemizing.
On the other hand, the new tax plan eliminates the current personal exemption of $4,050 per person that was used to lower taxable income. Currently, filers are allowed to claim personal exemptions for themselves, as well as for their spouses and children. Jeanne Sahadi of CNN Money warns that “for families of three or more kids, that could mute if not negate any tax relief they may get as a result of other provisions…”
State and Local Tax Deductions: The changes the new law makes to how state and local taxes (SALT) are treated for income tax purposes could have a significant impact, depending on where you live. After threatening to eliminate the deductions entirely, the GOP relented some. State and local taxes, including property, income and sales taxes, can still be deducted, but t amount that can be deducted is being capped at $10,000, where it was previously unlimited.
According to the Tax Foundation, most Americans claim a SALT deduction of less than $10,000. But the impact could be significant on people living where state and local taxes are high. The highest rates can be found in the following states.
STATES WITH HIGHEST STATE AND LOCAL TAX RATES*
|
Income Tax Rate California 13.3% Oregon 9.9 Minnesota 9.85 Iowa 8.98 New Jersey 8.97 |
Property Tax Rate New Jersey 2.38% Illinois 2.30 New Hampshire 2.15 Connecticut 1.98 Wisconsin 1.96 |
State + Avg. Local Tax Rate Louisiana 9.98% Tennessee 9.46 Arkansas 9.30 Alabama 9.01 Washington 8.92 |
*Source: Tax Foundation
Some high-tax states, notably New York and California, have vowed to fight the restrictions by changing their state tax codes and looking for sources of revenue that are not penalized by the new law. States with governments controlled by the Democratic Party have the best chance of succeeding, but it’s a complicated situation with no easy answers in sight.
For retirees, the changes to SALT further underscore the advantages of living in states with lower tax rates such as Nevada, New Mexico and Wyoming.
IMPACT ON FAMILIES
Child Tax Credit Expanded: In 2018, the child tax credit will double, to $2,000, for each child under 17-years-old. It will also be available to more people because the income restrictions on eligibility are being loosened. According to Sahadi, the new law will “raise the income threshold under which filers may claim the full credit to $200,000 for single parents, up from $75,000 today; and to $400,000 for married couples, up from $110,000 today.”