The current administration has drawn the curtains on its much talked about Republican tax plan proposal. The more than ambitious goal is to get the proposal passed before 2018.
If that will be the case, and whether all proposed points will be passed, is to be seen. Nevertheless, let’s take apart the proposal and see what’s in store for us should it get passed as is.
The Republican Tax Plan Proposal
The bill would reduce the number of marginal income tax brackets from the current seven to four. Simultaneously, the bill’s plan is to lower taxes by increasing the income ranges by rate.
The below example highlights the rate changes from 10% – 39.6% stretched over seven brackets to 12% – 39.6% ranging over four brackets. (The example ranges displayed are for married filing jointly filers.)
At first glance, all current brackets appear to either remain the same or result in fewer taxes. Except for the current 10% and 33% tax filers who will move up to 12% and 35% respectively.
Based on increases in the standard deduction and child tax credit though, filers in higher tax brackets are supposed to be receiving a tax break nevertheless.
Standard Deduction and Child Tax Credit Increases
The majority of Americans file the standard deduction, which makes this next change sound very appealing at first glance. Afterall, the plan proposes to close to double the standard deduction.
But, there is always a but, it also proposes to eliminate personal exemptions. For single filers and married filing jointly filers this will add up to a larger deduction in the end.
Married filing jointly with, for example, two children however will end up with a lesser deduction due to the elimination of personal exemptions.
Cue the increase in child tax credit. The child tax credit deduction will increase from $1,000 to $1,600. Additionally, a new $300 credit for each parent and non-child dependent is part of the proposal as well.
Whether both the increase in child tax credit and new parent / non-child dependent credit will make up for the personal exemption deduction lost will depend on the number of kids and other dependents you are filing for.
Elimination of State and Local Tax Deductions
This next change to the tax code would be bad news for a number of US states. All states with high state and property taxes to be exact.
The Republican tax plan proposal is an attempt to eliminate the state and local tax deductions. The below chart highlights which states currently have the highest state tax rates.
Which residents will be hardest hit is pretty apparent right from the start. To name the top few … California (13.3%), Oregon (9.9%), Minnesota (9.85%), New Jersey (8.97%), Vermont (8.95%), Washington DC (8.95%), Iowa (8.98%), and New York (8.82%).
If you live in these states, or other ones with lesser but still high state tax rates,and itemize your deductions when filing taxes, you will unfortunately lose out on this valuable deduction.
Furthermore, the following chart highlights the US states with the highest property taxes. Initially, the tax proposal wanted to eliminate the property tax deduction in its entirety.
The Republicans, however, had a last minute change of heart and retained some of the property tax deduction. Nevertheless, for the high property tax states, this change might mean more taxes in the end.
New Jersey clocks in as the state with the highest property taxes at 2.38%. Followed closely by Illinois at 2.32% and New Hampshire at 2.15%.
Ultimately, if the proposal is passed, the property tax deduction will be limited to $10,000. This might appear to be a lot in some states, but in the tri-state area for example the majority of properties carry a much higher tax burden.
Mortgage Interest Deduction
And the hits just keep on coming. For homeowners! The bill plans to lower the deduction for mortgage interest for new homes loans from $1M to $500k. In some states this might not be a big deal. But in cities such as San Francisco and New York City, home loans above $1M can very well be the norm.
Corporate Tax Rate
The corporate tax rate currently stands at 35%. The bill proposes a reduction to 20% alongside an elimination of most business deductions and credits. Exceptions to the rule are deductions for research, development, and low-income housing.
This change will cost the government the most revenue. So what is the idea behind it? The government wants to stimulate growth in two ways. One, by hoping that prices of goods and services will come down if fewer taxes are to be paid. And secondly by hoping fewer companies will reside and pay taxes on non-US soil.
Estate Tax Repeal
Same as the corporate tax rate, the estate tax repeal might not have an immediate impact on your life. Nevertheless, it is important to know that the bill would repeal the estate tax from inheritances over $5.5M for individuals and $11M for couples.
All things unchanged…
For a few weeks now, there had been rumblings about the 401(k) deduction being lowered to $2.4k from the current $18k. That, thankfully, is not part of the proposal.
We can all continue to contribute to our 401(k)s as we have been. Up to $18.5k in 2018 since the new IRS limits were published. You can read more about how $500 can make a $55k+ difference here!
Another unchanged item is that long-term capital gains and qualified dividend thresholds are to remain as is. So the bottom two tax brackets will continue to be eligible for 0% capital gains and dividend tax rates. Which is great news for you and your retirement portfolio!
Should you be worried about all of this?
Not at the moment. This is a bill proposal for now and not by any means a done deal. What you can do is the following:
- Continue to max out your retirement accounts. By maxing out your 401(k), IRA, and possibly HSA (if offered by your employer), you will continue to set yourself up for a bright future and happy retirement.
- If you are in the market for a home, consider how much you are spending and how you will be affected by the mortgage interest and property tax deduction changes. Possibly even decide to rent instead if you live in an overpriced real estate area.
- Once retired or in the market for a new job, consider moving to a state with low home prices, low property taxes, and possibly even no state income tax. Moving is tough, especially with family in tow. But it is worth a thought if it will save you thousands.
Take a look at this complete listing of all posts for more personal finance reads!