Congress has approved the most sweeping overhaul of the U.S. tax code in three decades, cutting individual income tax rates and removing a number of breaks and deductions. The plan will become law once President Trump signs it, as he has promised to do.
The full bill and supporting materials run to more than 1,000 pages, but here’s a quick look at what’s changing and how your tax bill might change, too, starting with the 2018 tax year.
Income tax brackets
» There are still seven federal income tax brackets, but the rates are broadly lower and the thresholds have changed.
How this could affect you: Generally, the bill lowers individual tax rates. But these new rules expire after 2025 unless a future Congress chooses to extend them.
Standard deduction and exemptions
» The standard deduction nearly doubles, so many more people may end up taking it. The personal exemption goes away.
How this could affect you: Taking the standard deduction for the 2018 tax year might score you a lower tax bill than itemizing would. Using the standard deduction generally takes less time than itemizing does, so it also could lower your tax-prep bill (and your stress level).
Also, your payroll tax withholding amounts are probably going to change in January or February, so prepare to see differences in your paycheck. You can adjust your withholdings by filing a new W-4 with your employer.
Child and family tax credits
» The child tax credit doubles, and a large portion of the amount is refundable.
How this could affect you: The child tax credit is bigger and more families will qualify for it. Taxpayers with non-child dependents also get a break. Up to $1,400 of the credit is refundable, which means lower-income families could get bigger refunds. The loss of the personal exemption cancels out some of the savings.
Homeownership tax breaks
» Tax breaks shrink for some homeowners. The mortgage interest deduction is scaled back for those with large mortgages, and the tax deduction for property taxes and state and local taxes is capped.
How this could affect you: If you’re thinking about buying a house or already have a big mortgage, read more on how the tax changes could affect homeowners. Note that you have to itemize to take the deductions for mortgage interest and state and local and property taxes, so this is less of an issue if you decide to take the standard deduction.
Education tax credits and deductions
» No big changes for those with student-loan debt or who rely on education credits. The 529 expansion could help families that send their kids to private school.
How this could affect you: If you have a child in private elementary, middle or high school, you can now use your 529 to pay tuition. Though contributions to 529 plans aren’t deductible on your federal tax return, they might be deductible on your state return.
Much remains the same for students, but there’s another political battle looming that could have bigger consequences for them.
Other itemized deductions
» Heavy itemizers could see a lot of their deductions go away.
How this could affect you: If you’ve been itemizing your tax return and you live in a state with high income taxes or you own a house in an area with high property taxes, this could work against you (if you’ve been deducting more than $10,000 and still plan to itemize). Lowering the medical-expenses threshold to 7.5% means more of your out-of-pocket costs in 2017 and 2018 could be deductible.
Also, under previous rules, a number of miscellaneous tax deductions allowed only the portion of the expense that exceeded 2% of your adjusted gross income to be deducted. There are many of these, but popular ones include deductions for a home office, tax-preparation expenses and a host of job-related expenses. The new bill gets rid of the 2% rule, as well as the deductions that were subject to it.
If you’re a big itemizer and your expenses were big enough to exceed the 2% threshold, this one could be painful. Remember, though, that you also may be moving to a lower tax bracket.
Other individual taxes
» A number of important tax regulations also saw some changes.
How this could affect you: The new rules concerning pass-through income may be good for freelancers and owners of profitable small businesses, but subject to some special rules based on your income and the type of business. It may be best to consult with your tax accountant about the full impact.
Does all this help me, or not?
Virtually everything takes effect on Jan. 1, 2018, and will impact the tax returns due in April 2019. (The return you’ll prepare this coming April generally will be under old rules; to get a sense of where you stand, try our tax calculator.) A number of the new rules expire on Dec. 31, 2025, though a future Congress could decide to extend them.
The House Ways and Means Committee says a typical family of four making $73,000 a year would save $2,059 per year in taxes. But we all know averages aren’t very useful if you’re wondering what’s going to happen to your tax bill.
People will get a wide range of non-average answers when they factor in real-life things such as where they live, whether they’ve been itemizing or taking the standard deduction, whether and how much they invest for college and retirement, whether they have a side gig, and — if they’ve been itemizing — what specific types of things they’ve been deducting.