Update: Many of the tax changes went into effect in January 2018 (though they didn’t impact the 2017 taxes you filed in April 2018) and employees should have seen changes to their paychecks starting in February 2018.
Earlier: President Trump signed the tax bill into law on Dec. 22, 2017. This came after the House passed the final version of the tax reform bill on Dec. 20, 2017, with a final tally of 224-201. Twelve House GOP members opposed the legislation and no Democrats voted for it. Originally, the House passed the bill on Dec. 19. A re-vote was necessary because several provisions of the bill reportedly violated Senate rules and needed to be removed. The Senate passed the corrected version of the bill in the early morning hours of December 20, voting 51-48 along party lines.
After months of speculation, President Trump and House Republicans unveiled their long-awaited tax bill, “Tax Cuts and Jobs Act” on November 2, 2017. The bill called for sweeping changes to current tax law.
How the Trump tax plan affects you depends on your income, your current filing status and the deductions you take. Take a look at our guide to the main features of the Trump tax plan.
New Trump Tax Brackets – Still 7 Total
Trump’s tax plan originally called for cutting the number of tax brackets in the federal income tax system from seven to four, but the final version of the bill maintains the seven brackets. It does, however, change them. The new Trump tax brackets have rates of 12%, 25%, 35% and 37%.
It’s worth noting that the new highest tax rate (37%) applies to single taxpayers with an income threshold of $500,000 and to married couples earning more than $600,000. Under the old income tax brackets (still valid for your filing for April 2018), the highest rate of 39.6% rate kicks in for single taxpayers earning $418,401+ and for married couples earning $470,701+.
This is how Trump’s tax plan stacks up against current federal income tax brackets:
Trump Tax Plan Calls for Increasing the Standard Deduction
There are deductions to consider as well. Changes are coming for taxpayers who take the standard deduction and for those who itemize. The Trump tax plan increases the standard deduction to $12,000 (for individuals) and $24,000 (for married couples filing jointly).
Under the old tax plan, the individual standard deduction is $6,350 for individuals and $12,700 for married couples. In other words the standard deduction nearly doubles under the Trump tax plan.
Trump Tax Plan Means Big Changes to State and Local Tax Deductions (SALT)
Back in September, Trump released an initial plan that called for eliminating almost all itemized deductions, including state and local tax deductions (SALT), but keeping those for charitable deductions and mortgage interest. For tax year 2017, taxpayers who itemize can write off their state and local income, property and general sales tax payments on their federal tax return. This effectively prevents double taxation.
Starting in tax year 2018, taxpayers can still deduct state and local income, sales and property taxes, though the deduction is capped at $10,000. The cap is $5,000 with the married filing separately status.
Trump Tax Plan Changes to the Mortgage Interest Deduction
For tax year 2017, homeowners who itemize their taxes can deduct their mortgage interest payments on mortgages up to $1 million. The new tax plan limits the deduction to mortgages up to $750,000. However it is not retroactive, meaning that current homeowners will not be affected but for future buyers it will be capped at $750,000.
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Trump Tax Plan Increases the Child Care Tax Credit
The child tax credit for tax year 2017 (impacting the taxes you filed by April 2018) was up to $1,000 per child. It’s a credit as opposed to a deduction. This means that it reduces your tax bill on a dollar-to-dollar basis by up to $1,000 per child. Say for example, you owe the IRS $4,000 and are eligible for the full $1,000 credit, you would now owe $3,000.
Trump Tax Plan Increases the Child Care Tax Credit
The child tax credit for tax year 2017 (impacting the taxes you filed by April 2018) was up to $1,000 per child. It’s a credit as opposed to a deduction. This means that it reduces your tax bill on a dollar-to-dollar basis by up to $1,000 per child. Say for example, you owe the IRS $4,000 and are eligible for the full $1,000 credit, you would now owe $3,000.
The Trump tax plan increases this credit to $2,000 for children under 17. The bill also changes who is eligible for the credit. Filers may claim the full credit if they have income up to $200,000 for single filers (up from $75,000 currently) and up to $400,000 for married couples (up from $110,000 currently).
On November 9, the House tax writing committee amended Trump’s tax bill to keep the adoption credit. The adoption credit continues to be worth up to $13,750 per child.
Trump Tax Plan Doubles the Estate Tax Deduction
Under current law, the estate tax (40%) applies when multimillionaires transfer property to heirs. The Trump tax plan doubles the estate tax deduction from $5.49 million for individuals and $10.98 million for married couples. This means wealthy families can transfer more money tax-free to their heirs.
Trump Tax Plan Lowers Corporate Tax Rate
The old corporate tax rate was 35%. Trump originally went on the record saying he hoped it would be slashed to 15%.
However the final tax plan reduces the corporate tax rate to 21% (down from 35%).
Bottom Line
Taxes can get confusing quickly and considering the new tax plan could potentially affect what you pay or owe by thousands of dollars, you might want to consult a financial advisor.
To make it as simple as possible, feel free to contact me for referrals.
Thanks for reading!
Carissa
@CarissaMortgage