The U.S. House of Representatives passed a $1.5 trillion tax overhaul earlier this week, and today President Donald Trump signed it into law.
A fractured Republican party came together quickly to pass the sweeping tax reform bill — the most aggressive in decades — without a single Democratic vote. The president claims the new bill will provide tax relief to the middle class.
The tax bill is the president’s most significant legislative achievement during his first year in office. President Trump also signed a funding bill designed to keep the government operating until January 19, 2018.
What you need to know about the GOP tax bill
President Trump and the GOP introduced their tax reform plan at the end of September, promising to enact changes before the end of the year.
Seven weeks later, after reconciling versions from both the House and Senate, the final tax bill is here.
The Tax Cuts are so large and so meaningful, and yet the Fake News is working overtime to follow the lead of their friends, the defeated Dems, and only demean. This is truly a case where the results will speak for themselves, starting very soon. Jobs, Jobs, Jobs!
— Donald J. Trump (@realDonaldTrump) December 20, 2017
Although it will cut taxes for 80 percent of Americans in 2018, the GOP tax plan is estimated to contribute $1.4 trillion to the federal deficit over the next decade — a figure that doesn’t account for future economic growth.
“After years of work, we are going to enact the most sweeping, pro-growth overhaul of our tax code in a generation,” said House Speaker Paul Ryan (R-Wisc.) in a statement. “Americans are going to see relief almost immediately in the form of bigger paychecks and lower taxes.”
Ryan promised that a “typical family making the median family income will get a $2,059 tax cut next year.” However, the Tax Policy Center, a division of the left-centrist Brookings Institution, published different results.
According to the Tax Policy Center’s calculations, here’s the average tax cut you can expect if you earn the following:
- Less than $25,000: $60 / .4 percent of after-tax income
- $25,000 to $48,600: $380 / 1.2 percent of after-tax income
- $48,601 to $86,100: $930 / 1.6 percent of after-tax income
- $86,191 to $149,400: $1,810 / 1.9 percent of after-tax income
- More than $149,400: $7,640 / 2.9 percent of after-tax income
Taxpayers in the top 1 percent — those with incomes of more than $733,000 — can expect an average tax cut of $51,000, or 3.4 percent of their after-tax income.
The individual tax breaks will expire in 2025 — a provision Republicans included so they could pass the bill with a simple majority.
“Most households would get a tax cut at first, with the biggest benefits going to those with the highest incomes,” wrote Howard Gleckman, a senior fellow at the Tax Policy Center. “After 2025, when nearly all of the bill’s individual income tax provisions are due to expire, only high-income people would get a meaningful tax cut.”
3 provisions that aren’t in the final tax bill
Though originally on the chopping block, these popular provisions remain intact in the final version of the bill.
Medical expense deduction
This allows people whose medical expenses make up more than 10 percent of their income to deduct those costs. The final bill actually makes the provision more generous; in 2018 and 2019, you can deduct medical expenses if they equal more than 7.5 percent of your income.
Student loan interest deduction
There was much outcry from borrowers about the proposed axing of the student loan interest deduction. Under the final tax bill, student loan borrowers can still deduct up to $2,500 of the interest they paid directly from their taxable income. Our student loan interest deduction calculator helps you determine if you’re eligible for this deduction and how much it is worth to you.
Graduate tuition waivers
In exchange for teaching classes, many graduate students receive tuition waivers from their universities. The initial GOP tax plan proposed viewing those waivers as income, which could’ve raised graduate students’ tax bills by 400 percent. However, that didn’t make it into the final bill.
7 ways the new tax bill could affect your wallet
Here are seven changes you should look out for when you review the final tax bill.
New tax brackets
Though seven tax brackets remain, the rates and income levels have changed.
Deductions and exemptions
The standard tax deduction will nearly double:
- For those who file taxes as individuals, it increases to $12,000.
- For couples who file taxes jointly, it increases to $24,000.
The child tax credit doubles, as well, to $2,000 per child, and $1,400 of it is refundable.
The personal exemption, which allows you to claim a $4,050 exemption for you, your spouse, and any dependents — and therefore lower your taxable income — has been eliminated.
Until now, you could only use 529 plans to save for your children’s college tuition. Under the new tax bill, you can use them to save up to $10,000 per year for private school fees at the elementary and secondary level.
With the new tax bill, you can only deduct interest on loans up to $750,000 for first or second homes. Previously, you could deduct interest on loans worth up to $1 million.
State and local tax deductions (SALT)
You can no longer write off all of your state and local taxes on your federal tax form.
Instead, you can only deduct up to $10,000 of property tax, plus either sales or income tax.
This provision is why 11 Republican representatives from high-tax states such as California, New York, and New Jersey voted “no” on the final version of the tax bill.
Health insurance mandates
Effective immediately, you’ll no longer pay a penalty if you opt out of health insurance coverage. While a boon for young and healthy people, it’s estimated to make the average premium increase by 10 percent for everyone else still enrolled in health insurance.
It could save the government money, though, since fewer people who require insurance subsidies — or who qualify for Medicaid — might sign up through the marketplace.
Individual tax benefits could expire in 2025
Unlike the corporate tax cuts, which are permanent, many tax benefits for individual Americans will expire in 2025.
Though Congress could extend them, it would increase the cost of the tax bill — which is already expected to add $1.4 trillion to the deficit.
How exactly this bill will affect the economy during the years ahead remains to be seen. In the meantime, find out how the new tax bill will affect you. Plug your numbers into a tax calculator (like these from the New York Times or the Washington Post), so you can prepare for the changes to come.
IRS and payroll accountants scramble to figure out employee withholdings
Now that the bill has passed, the IRS and others are left trying to decide how to manage withholdings from employee paychecks, reports Politico.
Right now, employees fill out a W-4 form and use personal exemptions to determine what should be held back for taxes. The tax bill gets rid of personal exemptions, rendering the current W-4 obsolete.
“Employers are going to be in limbo until they get some sort of signal from Treasury and IRS on what they plan on doing,” Will Hansen, a vice president of retirement and compensation policy at The ERISA Industry Committee, told Politico.
The IRS expects to issue guidance by January 2018, and changes to paychecks could be seen as early as February. However, it may take employers and payroll accountants significantly longer to roll out changes.
“It’s going to take 12 to 18 months to figure all this stuff out,” explained Eric Nisall, a tax professional with AccountLancer. “This was passed too fast to be able to adequately plan, and we won’t actually see the full administrative and economic ramifications until later.”
But before you get excited about a potentially bigger paycheck thanks to lower taxes, make sure you’re on top of your W-4 situation.
“Look at your paycheck and see what’s going on,” said Nisall. “Revisit your W-4 to see if you need to make adjustments. Too many people just use their personal exemptions to determine their withholding, and that could lead to penalties later if not enough is taken out of their paychecks.”
Miranda Marquit contributed to this article.