How the New Tax Cuts Might Affect You
By Dan Brough
If you follow the news at all, you probably know that a new bill cutting taxes was passed by Congress and signed into law by the President at the end of 2017. Talk about what might be in the bill had been swirling in the media for weeks. But now that the finalized bill is law, we don’t have to speculate. So what does The Tax Cuts and Jobs Act change and how will that affect you?
Reduction of Individual Income Tax Rates
This bill reduced and restructured Individual income tax rates. The number of tax brackets was reduced from 7 to 6. New rates will be 10%, 12%, 22%, 24%, 32%, 35%, and 37% whereas before the tax change, rates were 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%. For most of us, that will mean that we will be in a lower tax bracket under this bill than under previous tax policy.
Increase in the Standard Deduction
Another major change is an increase in the standard deduction. In fact, under the new bill, the standard deduction will nearly double, increasing from $6,300 to $12,000 for individuals, from $9,300 to $18,000 for heads of households, and from $12,700 to $24,000 for married couples. This change means that fewer taxpayers will be itemizing deductions and more taxpayers will be filing using the simpler 1040EZ form.
Increase in the Child Tax Credit
The bill holds good news for taxpayers with kids. The child tax credit was raised from $1,000 to $2,000 per child. This amount is a credit, not a deduction, which means it comes off the bottom line of tax owed, rather than the amount of income on which your liability is based.
Elimination or Reduction of Some Deductions
A number of common deductions have been either eliminated or reduced by the new law. One important change is that the amount of state and local tax that may be deducted has been capped at $10,000. Other deductions that have been eliminated include interest on home equity loans and moving expenses. Since fewer taxpayers are expected to itemize, these changes to deductions may not have a major effect on individuals’ taxes.
Doubling of Gift and Estate Tax Exemptions
Finally, another major change that might affect you is the doubling of the exemptions for gift and estate taxes to $10 million. This means that up to $10 million may be given as a gift or passed on to your estate without a tax penalty.
The IRS is set to issue their new tax tables to employers by early February so you should start seeing the effects of the new tax policy in your February paychecks. If you have specific questions about your personal situation, please see your tax advisor.
