With something as complex as the United States tax code, it can be challenging to fully understand the implications of the changes brought about by the new tax plan. Below are some frequently asked questions about the tax plan, and what it means for you and your family.
That’s a great question, and unfortunately the answer isn’t simple. It depends on who you are, what you do, how you earn your income, how many children you have and how much money you make. Many moderate income Americans who earn wages or a salary for a living will receive a modest tax cut this year, but then their taxes will go up in future years. Some people will pay more in taxes right away. On the other hand, very wealthy individuals are likely to enjoy large and persistent tax cuts. By 2027, 53 percent of Americans will have to pay more taxes because of this law.
If you’re a small business owner, the impact is also complicated. It will take time – and likely the help of an accountant – to figure out exactly how the new law applies to you. There is a new tax break for certain kinds of business income, but there’s also a chance that your type of business income does not fit exactly into the eligibility restrictions.
If you are a major shareholder or an executive of a large corporation like Walmart or Comcast, you will benefit greatly from this tax law. Under this new law, the corporate tax rate went down 40 percent – from 35 percent to 21 percent – and corporations are taxed less on profits made overseas. On top of all that, all the changes this tax law made to the corporate tax code are permanent, so the benefits to corporations don’t disappear in eight years.
Bottom line: it’s complicated, but most families will eventually pay more in taxes.
Health care and taxes are intimately connected in this law. The new law eliminates the requirement that everyone maintain health insurance, which will mean that roughly 13 million fewer people will be insured and health insurance premiums may rise by an extra 10 percent each year. If you receive your health insurance through your employer, the most likely effect is an eventual increase in health care costs to you. If you purchase your health insurance yourself, your premiums will go up right away.
Yes, many deductions that families rely on were eliminated or reduced under the new tax law, including the ability to fully deduct the cost of the interest on their mortgage payments, or the full cost of their state and local property tax, or the ability to deduct the cost of rebuilding after a fire destroys your home. However, many other deductions and other tax benefits remain in place. The deduction for charitable giving, for example, was not directly affected, though many fewer people will take it now due to the larger standard deduction. The new law also maintains the separate lower tax rate for investment income – income from the sale of stocks and other capital assets.
For the most part, this tax overhaul did not fundamentally simplify our system. You will still file taxes the same way you did before. You will still need to fill out the same forms, and there will still be choices you will have to make. For some people, however, the larger standard deduction will make doing your taxes a bit simpler. But for others, the law is likely to be more complicated.
This new law closes some loopholes, but it doesn’t touch others, widens some, and creates entirely new ones for some taxpayers. Because of the drastic overhauls of the corporate and international code, and the elimination of a lot of key deductions, many people will need to spend more time (and likely more money) preparing their taxes.
There’s no question that the new tax law is very expensive. The nonpartisan Congressional Budget Office found that the tax law would add $1.8 trillion to the national deficit over the course of 10 years.
But that doesn’t capture the whole picture. The $1.8 trillion is the net cost of the tax bill. Some people’s tax cuts are quite large, while other people pay more. For example, contained within the law is a $1.4 trillion cut for corporations and an $83 billion cut for the roughly 5,000 richest families in America. Those cuts are paid for, in part, by increasing taxes on others. For example, eliminating personal exemptions raises $1.2 trillion. So it would be more accurate to say that the tax law leaves us in a $1.8 trillion hole, a hole that would be bigger, save for the fact that some people are already bearing the burden.
If you are one of the ones who ends up paying less in taxes, that doesn’t mean you’re off the hook. It’s very possible that the federal government will have to raise taxes or cut services or benefits in the future to reduce the overall cost of the tax law. That’s happened before after large tax cuts. The true cost to you will depend on those future decisions.
Under the old tax system, you could reduce your taxable income by roughly $4,000 for every person in your family. The new law takes those exemptions away. While the new law does roughly double the standard deduction, the overall impact on your taxable income will depend on the number of people in your family. In general, families with three or more people will end up with more taxable income, not less.
SALT stands for State and Local Tax – the tax required by the community (city, county, and state) in which you live. Mainly, these taxes go to pay for schools, local infrastructure, and community needs like the local police force. The new law eliminates the ability to fully deduct from your federal taxes the taxes that you pay to your local communities, limiting the deduction to $10,000. This will mean higher overall taxes for some people. It may also affect the ability of localities and states to fully fund local services.