Some experts and lawmakers are calling the House tax reform bill the most significant tax reform legislation in a generation? There are many aggressive changes to the tax plan that, if approved, will affect how we all pay taxes in 2018. Let’s see exactly what you may or may not like from the new tax plan.
Your Next Tax Return Will Fit On a Postcard
Let’s start with the simplicity of the tax plan. If you have ever printed out your tax return, you know that it’s several pages long. One of the main selling points of the House of Representatives tax plan is that all the information the IRS needs fits on a postcard. Simple, right?
There Are Three Four Tax Brackets Now
The new tax reform bill reduces the number of tax brackets from seven to four (12%, 25%, 35%, 39.6%).
Most household will fall inside the 12% or 25% tax bracket. And, you may pay no federal income tax at all if your taxable income is less than $25,000 as a single filer or $50,000 as a joint filer.
Which bracket will you fall in? Let’s look at the table below:
|0%||$0 to $25,000||$0 to $50,000|
|12%||$25,001 to $45,000||$50,001 to $90,000|
|25%||$45,000 to $200,000||$90,001 to $260,000|
|35%||$200,001 to $500,000||$260,001 to $1,000,000|
As your income increases, you will pay more taxes. If you’re a single person that earns $40,000, you will pay 0% tax on the first $25,000 earned and 12% on the remaining $15,000. You will owe $1,800 in federal taxes.
What Else is Being Removed?
The official name for the House tax reform bill the Tax Cuts and Jobs Act. There has been a lot of banter and discussion on Capitol Hill and the media about what’s going and staying. Here are a few items that are being removed, if the Act passes unchanged.
Mortgage Interest Tax Deduction is Reduced
You will only be able to deduct up to $500,000 in paid home mortgage loan interest instead of the current $1 million deduction limit. You are only able to deduct the interest if you can “itemize.” Unless you have more than $6,350 (single) or $12,700 (married, filing jointly) in qualified itemized deductions like mortgage interest, charitable giving, state and local taxes paid, and medical expenses, you most likely won’t be able to claim this deduction.
The standard deduction is also proposed to double so it will be even harder to itemize. Most taxpayers will not be affected by this change.
Some State and Local Tax Deductions Will Be Removed
You can no longer deduct the state and local income and sales tax paid. However, you can still deduct up to $10,000 in state and local property taxes.
The original bill called for the complete removal of state and local tax deductions, so this is a benefit for taxpayers that pay property taxes.
Corporate Tax Rate Reduces to 20%
This tax rate reduction might not directly affect how much tax you pay, but, the U.S. has one of the highest corporate tax rates in the developed world at 35%. By reducing the tax rate to 20%, the U.S. House Republicans and President Trump believe there will be more incentive for U.S. businesses to hire more workers and not outsource as many jobs.
Since companies will not pay as much in taxes, you might receive a salary increase as well. Since the tax brackets have been simplified, you will pay less in taxes and have more disposable income.
Will this tax cut actually put the “jobs” in the Tax Cuts and Jobs Act? Only time will tell as businesses function independently from Washington D.C.
Removal of the AMT and Estate Tax
High-income families will also pay less taxes as the Alternative Minimum Tax will be eliminated immediately. And, the Estate Tax (sometimes called the “Death Tax”) will be phased out by 2024.
What Tax Deductions Will Remain?
Other tax deductions will remain the same or increase.
Child Tax Credit Expands
For each child you care for, you will receive a $1,600 tax credit. The current amount is $1,000 per child. Once your tax prep program decides what your tax bill will be, you can subtract $1,600 from that total for each qualifying child.
Retirement Plan Contribution Limits Remain Unchanged
The contribution limits will not be reduced. In fact, the 401k maximum contribution limit for 2018 is increasing by $500.
In 2018, you will be able to contribute up to $18,500 for your 401k account (up from $18,000 in 2017) and $5,500 for Traditional and Roth IRA accounts.
No Changes to Capital Gains Tax or Tax-Exempt Municipal Bonds
When you sell a stock investment, you can expect to pay the same capital gains tax rate as you do in 2017.
How much your capital gains tax is will depend on your federal income tax bracket.
There are currently three different capital gains tax rates: 0%, 15%, and 20%.
Unless you are in the bottom tax bracket (12%), you can expect to pay 15% on all long-term capital gains, that is profits you earned from investments you hold for at least one year.
Will The House Tax Reform Plan Be Signed Into Law?
It goes without saying, President Trump is hoping Congress will pass the U.S. House Tax Cuts and Jobs Act. The tax plan will still needs to be approved by both houses of Congress before Mr. Trump can sign it into law. If the tax plan does pass, it will be the most significant tax reform legislation passed in nearly 30 years. Lawmakers have been trying for decades to reduce the corporate tax rate and simplify the personal tax code.
Like any legislative bill, both Republicans and Democrats will need to make compromises to pass the bill. Republicans already kept some key deductions, like the State and Local Tax Deduction, to help win the support of lawmakers in high-tax states. If this tax bill is not passed, the 2018 tax code will be similar to the 2017 tax tables. In other words, nothing will change. If you are negatively affected by the proposed tax reform that can be good news, or, it can be bad news for those wanting a simpler tax code and lower tax rates for businesses and high-income households.