With a new administration sitting on the most powerful seat in the world, Trump’s new tax bill has many people wondering exactly what that means for their income tax in 2018. If you’re one of those people, here’s the skinny on the new tax bill and what it means for you.
Trump’s New Tax Bill: How Will It Affect You?
First and foremost, note that the new tax bill does not affect the returns you file in 2018. Those are reflective only of tax rates and rules for 2017. These new rules will affect tax returns for 2019. It will also affect taxes through 2025 for personal income tax returns and corporate taxes. Those changes have been made permanent, the effects of which will be discussed below.
For now, let’s consider some of the main takeaways from this new tax bill. These include increases in tax brackets, standard deductions, and the child tax credit. It also means a decrease in the number of people who will be itemizing.
Tax Bracket Increases
The tax brackets for single and joint filers are not increasing dramatically, but they are going up in 2018. A tax bracket determines how much you’ll pay for taxes. While your “tax bracket” is technically the highest bracket into which you fall in, as dictated by income, the tax rate is not a flat rate on all income. Instead, you pay the percentage of taxes on each tax bracket. That finally culminates with the percentage in your current bracket.
For instance, if you look at the 2018 tax tables, you can see how this works. For single filers in 2017, you paid 10 percent on $0-$9,325. In 2018, however, you’ll pay 10 percent on $0-$9,525. If you make $40,000, you’ll pay 12 percent on the intervening bracket and 22 percent on the amount between $38,701 and $40,000. Note that not only are tax brackets going up, the amount you pay in most brackets is going down.
Standard Deduction Increase
As of 2014, about 70 percent of Americans took the standard deduction, while others chose to itemize. However, the standard deduction is going up this year. Previously, the standard deduction was $6,350 with a personal exemption of $4,050. In 2018 and following years, these will be combined into a single $12,000 standard deduction. For married filing jointly, it’s $24,000.
Fewer People Itemizing
Because the standard deduction is going up so much, far fewer people will be itemizing. Estimates will vary, but some tax professionals put the rate at roughly 90 percent. That will mean simplified tax returns. Taking one deduction is far simpler than calculating donations, taxes, mortgage interest, property tax, medical expenses, and unreimbursed employee expenses.
The people who do still itemize will do it because they’re paying enough taxes and mortgage interests to bump the total amount above $24,000. In that case, it’s still worth it to itemize and deduct from income.
Child Tax Credit Change
The child tax credit is going up to $2,000 per qualifying child and will be refundable up to $1,400. This is very good news. While a non-refundable credit offsets the tax you owe but won’t generate a refund, a refundable credit still earns you a refund even if you don’t owe any taxes. The child must be under the age of 17 at the end of the pertinent tax year in order to qualify for the child tax credit. As many child dependents as you have in that year, you can earn that many child tax credits, too.
Permanent Corporate Tax Cuts, Impermanent Individual Cuts
The next tax bill creates only temporary tax cuts for individuals and married couples filing jointly. The corporate tax cuts, which are also substantial, have been made permanent. According to some, this is unfortunate. Such extreme tax cuts mean the wealthy will be substantially richer.
That’s not necessarily a good thing for everyone else. The United States uses a system premised on the collective good, with the understanding that people pay all these taxes to help everybody. The farther a person is down on the totem pole, the more the social welfare net benefits them. When the rich keep more money rather than paying it in taxes, there’s less money for food stamps, bus vouchers, job subsidies, and so on.
Check out this video discussing Trump’s new tax bill courtesy of CNNMoney:
Whether Trump’s new tax bill is beneficial in the long run or not, it will almost certainly mean fewer taxes for everyone for the next few years. Most agree that, at least, it’s a good thing. It will be interesting to see if that remains the case for the years to come.
What do you think of Trump’s new tax bill? Share your thoughts in the comments section below.