Last Week the GOP unveiled details of their new tax reform bill. Donald Trump has promised an overhaul to the American tax system and if the 429 page “Tax Cuts and Jobs Acts” is passed, he will have delivered. The details of the bill were confusing upon it’s initial release and I’m sure there is still some confusion out there. Being a professional tax preparer I feel it is important to understand the potential impending changes and how it will affect your life going forward.
To be quite frank, this bill seems to benefit high net worth citizens of our country in addition to big corporations and to be blunt it is no surprise. The collateral damage of this massive change would add $1.51 trillion to our national deficit over 10 years. To be fair, the Obama administration did not do much to decrease the deficit either. Read further for the details on the possible major changes.
Increase In Standard Deduction: The standard deduction for individuals will increase to a flat $12,000 per individual compared to $6350 currently.
Elimination of Personal Exemptions: No longer would individuals be able to take a personal exemption for themselves, dependents or spouse. In the past exemptions slashed earned income by 4,050 per taxpayer.
Changes to Tax Brackets: Moving forward there would be just four tax brackets. 12% (on the first $45,000 of taxable income for individuals; $90,000 for married couples filing jointly). 25% (starts at $45,000 for individuals; $90,000 for married couples). 35% (starts at $200,000 for individuals; $260,000 for married couples). 39.6% (starts at $500,000 for individuals; $1 million for married couples). Currently there are seven federal income tax brackets in today's code that are taxed at 10%, 15%, 25%, 28%, 33%, 35% and 39.6%.
Increase In Child Tax Credit: The child tax credit would increase to $1,600 per child, up from the current $1,000 per dependent child. More families would be able to take advantage of this credit because the phaseout limit will increase to $115,000 in annual income compared to $75,000 currently. However this change will likely hurt families who are in need the most.
Elimination of Student Loan Interest Deduction: No longer would most middle class Americans be able to deduct the interest paid on student loan debt under this new bill.
Limits Mortgage Interest Deduction: Now interest can only be deducted on homes purchased at a maximum of $500,000. Down from the previous the $1 million limit.
Elimination of Medical Expense deduction: Those who saw relief for medical bills totaling over 10% of your AGI (adjusted gross income) will no longer be able to deduct those expenses.
No Changes To 401K’s: 401k contribution limits would remain the same although their were almost proposed changes to lower the maximum limits.
It is far too early to gauge the impact of this proposal. If passed, I doubt it would go into effect this upcoming tax season. Congress does not usually move so swift on these matters. The GOP believes most American’s should see tax relief under the new plan. However, there have been mixed reactions to the news thus far and only time will tell.