President Donald J. Trump signed the GOP Tax Reform into law on December 22, 2017.
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Regardless of your political leanings, it is important to ensure that you have a good understanding of how the new tax law will impact your life. This GOP Tax Reform represents the biggest change to the nation’s tax system in several decades. In other words, many of the tax rules that you’re used to will no longer work the same way.
There are potential pros and cons for every taxpayer, and some of the changes that go into effect during the next few years are only temporary. This has caused confusion among many taxpayers, but there’s no reason to stay in the dark. Instead, take a closer look at seven of the most important things you need to know about the recent GOP Tax Reform.
1. When Does It Go into Effect?
Perhaps the biggest point of confusion regarding the new tax rules are when they officially take effect. One thing that a lot of people are looking forward to is the increased standard deduction. This does appear well-poised to offer relief to hundreds of millions of people, but it won’t be available when you file your taxes this year. Instead, you’ll need to wait until next year’s tax filing to reap this particular benefit.
2. Your Income Tax Rate Will Probably Change for the Better
As of January 1, the income tax rate has changed for almost everyone. Tax withholding is also changing, and employers are required to put these new rules into effect. Most people won’t see a difference in their paychecks until sometime in February. How will this change your take home pay? Let’s take a closer look at the new income tax rates, which are expected to stay in place until 2025.
- 10 percent: $0-$9,525
- 12 percent: $9,526-$38,700
- 22 percent: $38,701-$82,500
- 24 percent: $82,501-$157,500
- 32 percent: $157,501-$200,000
- 35 percent: $200,001-$500,000
- 37 percent: $500,000+
Married, Joint Filers
- 10 percent: $0-$19,050
- 12 percent: $19,051-$77,400
- 22 percent: $77,401-$165,000
- 24 percent: $165,001-$315,000
- 32 percent: $315,001-$400,000
- 35 percent: $400,001-$600,000
- 37 percent: $600,001+
This portion of the GOP Tax Reform won’t have any impact on people in the lowest income bracket as their rate remains unchanged. Everyone else benefits by a 1-4 percent reduction, with two notable exceptions:
- Individual filers making between $200,001 and $424,950 will see a 2 percent increase.
- Married couples filing jointly making between $400,001 and $424,950 will see a 2 percent increase.
3. The Standard Deduction Doubles
You will see a major change in your standard deduction next year that has the potential to put a lot of extra money in your pocket.
This year’s (2017 tax year) standard deduction:
- Single Filer – $6,350
- Married, Filing Jointly – $12,700
Next year’s (2018 tax year) standard deduction:
- Single Filer – $12,000
- Married, Filing Jointly – $24,000
4. Personal Exemptions Are Eliminated
The new standard deductions are very enticing. At the same time, many other deduction opportunities will be eliminated, including personal exemptions. Approximately 70 percent of taxpayers don’t itemize their taxes, but this could be costly for those who currently do.
5. GOP Tax Reform Limits the Deduction on Mortgage Interest
When you file your taxes this year, you will still be able to take advantage of a robust mortgage interest deduction for any mortgages that are valued at $1.1 million or less. Next year, this will only be available for mortgages valued at $750,000 or less.
Another major mortgage interest change is the complete elimination of the home equity loan deduction. This is the last year you will be able to deduct interest on home equity loans worth up to $100,000.
According to Zillow, the median value of a home in the U.S. is $206,300, which means most people won’t be affected by these changes. However, people who own property in higher values areas such as San Francisco could lose a lot of money with this tax rule change.
6. Taxpayers Can Deduct Up to $10,000 in State and Local Taxes
A $10,000 deduction for state and local taxes may seem like a good deal to some taxpayers, but it could hurt anyone who lives in an area with high property or income taxes. For example, the average state and local taxes (SALT) deduction taken by California residents is $18,400. Therefore, a married couple filing jointly may gain $12,000 through the standard deduction, but they’d lose $8,400 through the reduced SALT deduction. On top of which, they would no longer be able to itemize other deductions to achieve the best possible results.
7. The Effect of the GOP Tax Reform on Businesses
The size of each business will determine how big of an impact these new tax rules have for each owner. A few items of note:
- New business equipment can be deducted immediately instead of over five years.
- The net interest deduction is now capped at 30 percent instead of being unlimited.
- Pass-through businesses will receive a 20 percent income deduction.
- C-corp businesses will receive a 21 percent income deduction.
As you can see, this category includes pros and cons for business owners. Economists have considered the potential impact of these changes, and they believe most companies will experience an increase in profits. This is expected to have a positive impact on the economy, but it’s too soon to tell how worker wages and job growth will be impacted.
A poll by the Federal Reserve Bank of America found that 59 percent of companies don’t plan to add new jobs as a result of the GOP Tax Reform. At the same time, many large companies are pledging to provide bonuses or pay raises to their employees. It’s possible that existing wages will go up without a huge increase in job growth, but we won’t get any conclusive evidence for a few years.
Ultimately, the impact of the new tax rules will be felt by every American. Dealing with so many changes is likely to leave people confused throughout the first few years. If you have any questions, be sure to consult with the IRS or a tax professional.