Congress unveiled its tax reform plan yesterday. Could it mean a big break—or a bigger bill—for your family?
Republicans unveiled their tax reform plan—the Tax Cuts and Jobs Act—yesterday, promising tax cuts for the middle class and for corporations to help bring jobs back to the U.S. But can they deliver? Here's where the bill stands currently—and how it may impact your family.
The Good News
The standard deduction has nearly doubled. The standard deduction will go up under the new plan, to $12,000 for individuals, or $24,000 for married couples. The bill's authors hope this increased standard deduction will actually decrease the number of people who need to itemize deductions.
They created a new "family credit." The new tax plan increases the child tax credit to $1,600 per child, from the current $1,000. The plan also lets more people claim the child tax credit—the new bill would allow couples who make up to $230,000 to claim it. They also created a $300 credit for each parent or nonchild dependent—you can claim that $300 credit for an elderly family member you're caring for, or for an over 18 son/daughter who is still reliant on you.
They created fewer tax brackets. Our current system has seven tax brackets, which the new plan would reduce to five: 0 percent, 12 percent, 25 percent, 35 percent, and 39.6 percent. But reducing the tax brackets has left some pockets where people may be paying an increased tax rate. For instance, families who make more than $260,000 but less than $416,500, who would have been billed at a 33 percent rate before, would move up to the 35 percent tax bracket in the new system.
401K savings were left untouched. Some Congresspeople had suggested significantly reducing the tax-deduction benefits of the 401K, from the current $18,000 per year workers can put away to as low as $2,400. But the current plan has left this popular option for retirement savings alone.
Two taxes that impact the wealthy will disappear. If you're in the highest tax brackets, you may be in luck: The bill removes the alternative minimum tax, which often impacts high-income earners—and first reduces, then eliminates, the estate tax, which currently impacts families who inherit estates worth over $5 million.
You can use 529 plans to pay for private K-12 education. The 529 accounts, typically used to allow college savings to grow without paying tax on the investment gains, would be able to be used for up to $10,000 in elementary and secondary school tuition.
The Bad News
Personal exemptions were eliminated. Currently, families exempt $4,050 in income from taxation per person with the personal exemption. That goes away in the new bill—which could impact many families, but especially families who have more than one child.
State and local tax deductions were eliminated. If you live in a state with high state and local taxes—such as California, New York, New Jersey, Oregon, and Minnesota—you will no longer be able to deduct what you pay in taxes to your local government.
The property tax deduction was capped. Families can only deduct a maximum of $10,000 they pay in property taxes—a problem for families in states with high property tax burdens.
Dependent care account deductions were cut. Some families used dependent care accounts to save aside money pre-tax for childcare. That has been eliminated.
College tuition tax benefits were cut. The Republicans cut two educational tax credits, the Lifetime Learning Credit and the Hope Scholarship Credit, each of which can reduce a family's tax bill when they're paying for college.
Mortgage interest deductions may be reduced. Mortgage interest is a popular deduction for homeowners. Currently, you can deduct interest on home loans up to $1 million. People with existing mortgages will be grandfathered in, but on new mortgages, you will only be able to deduct interest on loans up to $500,000.
The adoption tax credit will end—and employer-provided adoption financial assistance would be taxed. The adoption tax credit, which allows adoptive parents to write off up to $13,570 in fees they pay to adopt children, has been repealed in the Republican tax plan. And if your employer offers adoption financial assistance, it will now be taxed as regular income.
The student loan deduction is gone. If you're still paying back student loans—and currently deducting the interest you pay—that deduction will disappear in the new tax plan.
The medical expense deduction disappeared. If your family has significant medical expenses (more than 10 percent of your income), the current tax law allows you to deduct those expenses. But this new tax bill will remove that deduction.
Teachers may be stuck paying more for supplies. Currently, teachers are able to deduct up to $250 they put toward supplies for their classroom, but that deduction disappears in the new bill.
The deficit will increase. The bill would increase the deficit by $1.5 trillion over the next decade.
The bill is still being debated, so there's time to give your representatives feedback on how this tax bill will impact your family's finances. Call 202-225-3121 to connect with your Congressperson and share your thoughts.