Republicans recently passed a tax reform package that will overhaul everything from tax brackets to deductions to the corporate tax rate.
Here’s what’s in the Republican tax plan and how it could affect you.
In the end, Republicans stuck with seven tax brackets, although they deviate slightly from the current brackets: 10, 15, 25, 28, 33, 35 and 39.6 percent.
Here are the new tax brackets:
If you file as a single person, you’ll pay 10 percent on the first $9,525 that you make in a year. After that you’ll pay:
- 12 percent on earnings between $9,526 and $38,700.
- 22 percent on earnings between $38,701 and $82,500.
- 24 percent on earnings between $82,501 and $157,500.
- 32 percent on earnings between $157,501 and $200,000.
- 35 percent on earnings between $200,001 and $500,000.
- 37 percent on earnings between $500,001 and up.
If you’re married and file jointly, you’ll pay 10 percent on the first $19,050 that you make in a year. After that you’ll pay:
- 12 percent on earnings between $19,051 and $77,400.
- 22 percent on earnings between $77,401 and $165,000.
- 24 percent on earnings between $165,001 and $315,000.
- 32 percent on earnings between $315,001 and $400,000.
- 35 percent on earnings between $400,001 and $600,000.
- 37 percent on earnings between $600,001 and up.
THE STANDARD DEDUCTION
Anyone can take a standard deduction rather than itemizing. The Republican tax plan will double the standard deduction to $12,000 for single taxpayers and $24,000 for people who are married and filing jointly. That means, for instance, that if you’re married and you earn $124,000 in a year you could take the $24,000 standard deduction and would only have taxable income of $100,000.
CHILD TAX CREDIT
Currently, you get a tax credit of $1,000 for each child, and the credit starts to phase out for married couples who have more than $110,000 in taxable income. Under the new plan, the tax credit will double to $2,000 per child and won’t start phasing out until you have $400,000 in taxable income, if you’re married and filing jointly.
This could be a big deal for families because a tax credit reduces the amount you owe in tax dollar for dollar. That means if you owe $14,000 in tax and have two children, you will only have to pay $10,000.
MORTGAGE INTEREST DEDUCTION
This is bad news for people planning to buy expensive homes with large mortgages. Currently, you can deduct the amount you pay in interest on mortgages up to $1 million. The Republican tax plan will allow an itemized deduction on new loans up to $750,000. However, existing mortgages wouldn’t be affected.
STATE AND LOCAL TAXES
This could be a hit for some people who live in high-tax states. You will only be able to deduct up to $10,000 in state and local income or sales taxes as well as property taxes. And you will have to itemize to take the deduction.
The new tax plan gets rid of your ability to claim a $4,050 personal exemption for you, your spouse and your dependents (which may include elderly relatives and children).
For 2017 and 2018, you will be able to deduct medical expenses that are more than 7.5 percent of your income if you itemize your deductions. That’s down from 10 percent, which means more of your medical expenses could potentially be deducted. The tax overhaul also repeals the mandate that people have health insurance beginning in 2019.
The tax overhaul won’t affect the current tax treatment of student loan interest or graduate student tuition waivers. It will expand your ability to use 529s for education. Current 529 accounts (which grow tax free) can only be used for qualified higher education expenses. Under the new plan, you will be able to use up to $10,000 per year from a 529 for K-12 private tuition. Originally there was a provision that would have allowed these funds to be used for certain home schooling expenses, but it was removed before the final vote.
THE ALTERNATIVE MINIMUM TAX
The AMT for individuals, which imposes a minimum tax on people who make more than a certain amount, won’t go away. But the Republican tax plan will increase the threshold at which AMT kicks in and when exemptions phase out.
You will need more than $11 million before you would have to worry about estate taxes as the estate tax exemption has been raised significantly.
The Republican tax plan includes a 20 percent deduction for pass-through businesses like S corporations, partnerships and sole proprietorships. This affects businesses in which the earnings pass through to the owner’s individual tax return, which is how many small businesses operate. The deduction for pass-through income will phase out for some individuals based on their income, starting at $315,000 for joint filers ($157,500 for single filers).
CORPORATE TAX RATE
The tax overhaul will cut the corporate tax rate from the current 35 percent to 21 percent. The bill also repeals the corporate AMT.
Most people won’t see any changes to their 2017 tax bill. But the changes will affect most of us in 2018, including what you’ll owe when you file your taxes in 2019.
This publication is not intended as legal or tax advice. Taxpayers should seek advice based on their particular circumstances from an independent tax advisor.
(This article was updated on December 20, 2017, to reflect the passage of the final legislation.)