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What Trump's New Tax Law Means For You

An overhaul of the U.S. tax code, a major piece of President Donald Trump's agenda, has become law, and these changes will have an impact on nearly every American. Tax laws are never simple, and this overhaul will be no exception. We can reach a few general conclusions about winners and losers, though. As you've probably heard, the proponents of the bill claim that almost all taxpayers will see cuts, with the largest of them given to the middle class. According to the new plan this is true, however, you probably won't be surprised to learn that there's a catch to this. Almost everyone will get a significant tax cut in 2018, but the tax cuts for the individual or household taxpayers will expire by 2027, while corporate tax cuts and those benefitting the very wealthy will remain permanent. The Wall Street Journal summed it up this way:

"…by 2021, households making between $10,000 and $30,000 would have a higher tax burden than if Congress did nothing. And by 2027, after individual tax cuts would expire, every income group under $75,000 would have tax increases, on average."[1]

This means that for the average household, there will be a short-term break, but it won't last long.

Winners And Losers
If you're a corporation, you're a big winner. The new law slashes the corporate rate from 35 percent to 21 percent. That's by far the most dramatic tax cut; and that cut is not designed to expire, unlike the individual tax cuts. Also, corporations will no longer pay tax on money they earn abroad.

Owners of limited liability corporations, partnerships, sole proprietorships and other "pass-through" businesses are winners. The provisions helping these businesses are designed to help small businesses, but many large businesses (including the Trump Organization) are structured in this way as well.

Low-income Americans will be on the losing end of this new deal. They won't pay more because most aren't paying federal taxes anyway, but the $1.5 trillion cut in federal income driven mainly by the corporate tax cut will mean pressure to cut many government programs supporting this group.

Ultimately, working and middle-class Americans will become short-term winners, and long-term losers. In 2018 most will see a tax reduction, but by 2027 that reduction will convert to an overall increase for 53 percent of Americans as individual cuts expire.[2]

Additionally, Americans using health insurance marketplaces under the Affordable Care Act will lose ground. The new law removes the tax penalty for the uninsured, which is expected to leave up to 13 million more people uninsured and increase premiums by an average of 10 percent over a decade.[3]

Some individual households will see an increase in taxes, as the new law limits personal deductions and removes state and local tax deductions.

How Your Tax Return Could Change
Here is a summary of the changes that could make filing your 2018 returns a different experience than what you've come to expect.

New Brackets
Currently, there are seven different federal income tax brackets:

Taxable Income for a Married Couple Rate
$0 - $18,650 10%
$18,650 - $75,900 15%
$75,900 - $153,100 25%
$153,100 - $233, 350 28%
$233,350 - $416,700 33%
$416,700 - $470,700 35%
$470,700 and up 39.6%
Under the new law, there will still be seven income brackets, but both the income threshold and the rates will change as follows:

Taxable Income for a Married Couple Rate
$0 - $19,050 10%
$19,050 - $77,400 12%
$77,400 - $165,000 22%
$165,000 - $315,000 24%
$315,000 - $400,000 32%
$400,000 - $600,000 35%
$600,000 and up 37%
It can be difficult to look at lists of numbers like these and come away with a real-world understanding of what these changes mean, especially when they only paint part of a very large picture. The way you determine your taxable income involves much more than your income. The amount you can legally deduct from your taxable income usually goes a very long way towards whether you owe "Uncle Sam" or get a refund check.

Changes In Deductions
The way deductions work will change significantly under the new law, which is why you can't just take your pre-tax income and multiply it by the rate to determine how much you owe.

First, the standard income deduction will nearly double under the new law, increasing to $12,000 for individuals and $24,000 for married couples. This law offsets that increase by eliminating the personal exemption of $4,050 per person.

If you have children, there are more changes you need to know about this new law. The child tax credit will double from $1,000 to $2,000, but only $1,400 will be refundable, which will have a negative impact on lower income families with children. To receive the child tax credit, parents must report the Social Security number of each child on their tax returns. The expanded child tax credit is set to expire after 2025, at which point it will go back to $1,000 per child.

Higher-earning families with children will see a boost, as the child tax credit will now be available to families making up to $400,000 per year. This increase is a big change from the current law, which didn't allow families earning more than $100,000 to claim the child tax credit.

If you are a homeowner or a prospective homeowner, the mortgage interest deduction remains in place, but the amount you can deduct on interest payments will be going down from $1 million to $750,000. This reduction is another provision set to expire in 2025.