What the new tax law means for your wallet

Wallet on a wooden table

The following article is presented for informational purposes only. For advice on your unique situation, please consult with a qualified tax professional.

New tax laws were signed on December 22, 2017. The Tax Cuts and Jobs Act cuts the corporate tax rate down from 35 percent to 21 percent starting this year. And the highest individual tax rate will drop to 37 percent. While income tax rates are being cut, the standard deduction doubles and personal exemptions are eliminated. The corporate tax cuts are permanent but the individual changes will expire December 31, 2025.

Here’s what you need to know:

Personal Income Taxes

The seven current income tax brackets remain but tax rates are lowered. If you’re an employee, you’ll see the change reflected in your withholding beginning in February 2018. These cuts will remain in effect for you until the end of 2025 and your rates will revert back to 2017 rates beginning January 1, 2026.

Income levels for each tax bracket will rise each year with inflation, but the rise will be slow. Over the next eight years it will move more people into a higher tax bracket, which will increase their tax rate.

The standard deduction is doubled. If you’re a single filer, your deduction increases from $6,350 to $12,000. For married and joint filers, it increases from $12,700 to $24,000. This will also revert back to current rates in 2026.

Personal exemptions are eliminated. Previously, you could deduct $4,150 from your income for each dependent you claimed. This means, for families with several children, you’ll pay higher taxes even with the increased deduction.

Most itemized deductions are eliminated as well. You can no longer deduct moving expenses unless you’re in the military. And if you pay alimony, you can’t deduct it anymore, but the receiver can. This change will go into effect in 2019 for divorces that are signed in 2018.

You can still deduct charitable contributions, retirement savings, and student loan interest.

Mortgage interest deductions are now limited too, to the first $750,000 of the loan, but current mortgage holders are not affected. Interest for your home equity loan is no longer deductible.

You can deduct up to $10,000 in state and local taxes, but you must choose between property taxes and income or sales taxes. If you live in a high-tax rate state, you will be affected the most.

Obamacare penalties are now gone. If you don’t have health insurance, you do not need to pay the penalty fee.

Children and Seniors

The Child Tax Credit is doubled from $1,000 to $2,000. Even if you don’t earn enough to pay taxes, you can claim a credit of up to $1,400.

529 Savings Plans can be used for tuition for private and religious K-12 schools and for expenses for home-schooled students.

A $500 credit is allowed for each non-child dependent, including any elderly parents you may be caring for.

This tax plan is more beneficial for businesses than individuals, especially since their cuts are permanent and individual cuts are temporary. But many large corporations are announcing raises for their employees due to the tax cuts so if you work for a corporation, there’s a possibility that you may be seeing more money in your paycheck over the next few years.

Ready to take on your taxes?

Tagged in Taxes, Laws and legal questions

Emilie writes about overcoming debt, while balancing trying to eat healthy, stay fit, and have a little fun along the way. You can find more of her work at BurkeDoes.com.