Bryce L. Jorgensen, Extension Specialist in Personal and Family Finance
Empowering People, Enhancing Lives
Empowering People, Enhancing Lives
Now that lawmakers have passed a new tax plan, many are left wondering how the new plan will affect them. Below are some of the main takeaways to help you understand some of the changes and what they mean for you.
What's happening to the standard deduction?
It's roughly doubling -- from $6,350 to $12,000 for individuals, and from $12,700 to $24,000 for married couples filing jointly. Because of this, more people will take the standard deduction and fewer will itemize.
What does the bill do to the child tax credit?
The child tax credit is doubling -- from $1,000 to $2,000, with an increase for the refundable portion of the child tax credit to $1,400. This is great news for families with children and means a lot more money back in their pocket.
What if I give to charity?
The charitable deduction will remain as it is. So, if you itemize your deductions, you may be able to deduct charitable contributions that are made to qualifying organizations. According to the IRS, you may deduct up to 50 percent of your adjusted gross income, although some filers are limited to 20 percent and 30 percent.
Do I still have to pay Obamacare penalties if I don't have health insurance?
No. The new tax law eliminates penalty under the Affordable Care Act for failing to have health insurance.
How will the tax plan affect homeowners or home buyers?
The mortgage interest deduction will stay in place for all homeowners with existing mortgages. If you're about to buy a home, the home mortgage interest deduction will be available for mortgages up to $750,000.
Can I still deduct my state and local taxes?
Up to a point, and you'll have to make a choice. Filers will be able to write off the cost of state and local taxes, up to $10,000. And they must choose from among sales, income and property taxes for the deduction, instead of being able to deduct all local taxes.
Are your children in private school?
Under the tax plan, parents will be able to use up to $10,000 per year tax-free from 529 college savings accounts for K-12 tuition. According to the laws on the books right now, those funds can only be used for college plans.
How big a tax cut did corporations get?
The tax legislation lowered the corporate tax rate from 35 percent to 21 percent. Because of this corporate tax cut, at least in part, many businesses are raising minimum wages and/or giving bonuses to their employees. For a list of some of the companies see http://money.cnn.com/2018/01/11/news/economy/tax-law-raises-bonuses/index.html
How might taxes in a family with two children look under the new tax law?
Let's take a couple that fits the typical idea of "middle class." Mary and John are married, have two children and two jobs, earning a combined $71,000 -- the U.S. median for a family last year. Like about two-thirds of taxpayers, they don't itemize but take the standard deduction. Let's also assume they contribute a tenth of their joint income to a tax-deferred 401(k) plan run by their employer.
Under current law, the standard deduction and personal exemptions for Mary and John and their two dependents bring their taxable income down to $35,000; they also benefit from the child tax credit, bringing the family's total federal taxes to $2,317. (That figure doesn't include payroll taxes that are also taken out of their paychecks.)
Under the new tax plan, they would have slightly more taxable income -- $39,900 -- as a result of a doubling of the standard deduction for a married couple while doing away with personal exemptions. The tax bracket they're in would go down from 15 percent to 12 percent; the child tax credit would also double, reducing their federal liability to just $407. So all other things being equal, the family would save $1,910 in federal income taxes under the new tax law. (From https://www.cbsnews.com/news/gop-new-tax-bill-winners-and-losers-4-different-families/)
If you’re single, here’s what your tax bracket looks like versus what you’re currently paying.
For married couples filing jointly, here’s how the rates work out under the new tax bill: