Thank you for sharing!

While many of us were busy preparing for the holidays, Congress was busy passing a new tax bill (you can read the full text here). No matter your political persuasion (or personal opinion on the new tax bill, congress or our sitting President), it has officially become the new law of the land and goes into effect on January 1, 2018. There are lots of sensational headlines out there and many claim it only cuts taxes for the wealthy and corporations, but here’s what every family needs to know about how the new tax bill will affect YOU and your family finances in the coming year.

---

What You Really Need to Know About the New Tax Bill

If you only read the headlines out there, you’d think the only one getting any benefit from the new tax bill is big corporations and millionaires. But if you actually read the new tax bill, that’s just not true. But given the way it is written – only citing changes and edits to the existing tax code – it is more than a little difficult to figure out what those changes actually are. After lots of flipping back and forth, and more than a few headaches, here are the highlights most important for your family.

The New Tax Bill Takes Effect January 1, 2018

All changes in rates and policy are effective as of January 1, 2018 and most last through December 31, 2025. The taxes you file come April 2018, for income earned in 2017, are not impacted by this new bill. However, your paycheck will likely be impacted (most likely for the better) immediately in the new year. Review the other changes below, and contact your benefits administrator in the event you need to make changes to your withholdings for the 2018.

Marginal Rates are Better for Everyone

While the big headline grabber is the reduction in corporate income tax rates from 35% to a more globally comparable and competitive 21%, marginal income tax rates are actually getting better for everyone. These are the rates applied to your taxable income (gross income less all deductions) to determine the taxes you pay each year.

Yes, they are improving more dramatically in dollar terms for higher income earners, but even for the average family making $75,000 per year (approximately the average household income according to the last US census in 2014) taxes will decrease by over 16% ($8,619 under new tax rates vs. $10,317 previously).

And Standard Deductions Are Getting a Big Boost

You pay income taxes on your gross income less a defined set of deductions permitted by the tax code. Everyone gets to take a Standard Deduction. Under the old tax code, the standard deduction was $4,400 for the head of household, and $3,000 for any other case.

This amount was set in 2008, and adjusted for inflation so the standard deduction in 2017 will be $9,350 for head of household and $12,700 for joint filers. (Again, this is so complicated the IRS has to file tables every year so people know what these numbers are!).

The new tax bill sets these standard deductions higher – in the hopes of easing tax filings and eliminating itemization of deductions for more people. Under the new tax bill, the Standard Deduction is $18,000 for head of household, $24,000 for joint filers, and $12,000 for any other case.

Child Tax Credits are Doubling for 98%+ of Families

Families will now receive a $2,000 child tax credit for each qualifying child in their household. Previously, the child tax credit was only $1,000, and began phasing out for those married filing jointly earning over $110,000 annually. Not only is the credit doubling, the threshold for phasing out the credit has now been raised to $400,000 for joint filers, a tremendous benefit to 98%+ of US families.

Did you know there’s a new tax bill in place for 2018? Learn the key changes that will impact your family finances going forward

Repeals Individual Insurance Mandate

Under the Affordable Care Act, anyone electing not to purchase insurance coverage was subject to a penalty of at least $695 annually or 2.5% of income. Effective January 1, 2019, these penalties, known as the Individual Mandate, are eliminated completely.

Improves AMT Limits

The Alternative Minimum Tax was established to prevent wealthy individuals from itemizing deductions, and as a result, paying little to no taxes. If your taxable income is over a set amount (previously $78,750 for joint filers), your taxes were calculated two ways: per the details of the tax code and at a set alternative minimum tax rate (26-28% depending on excess tax calculated) and you have to pay the higher amount.

However, over the years, the threshold income level at which the AMT test was applied failed to rise with inflation, subjecting more and more middle income households to AMT, and eliminating any benefits of standard deductions for families. The new tax bill raises these income levels for personal income taxes… from $78,750 to $109,400 for joint filers.

Pass Through Deductions on Qualified Business Income

Anyone else a work at home mama like me? Whether you are a consultant, have your own LLC or run another small business as a sole proprietor, this is a big benefit for you. Since corporations are getting a tax cut, so are you!

Previously, pass through entities paid income taxes as individual tax rates. Under the new tax bill,  you can apply a 20% deduction to your pass through income, subject to limits that phase in at $315,000 income levels for joint filers.

But Some Deductions Are Getting Capped

The other big headline grabber? There are two big deductions getting capped. First, if you live in a state or town with high income or property taxes, beware. Federal deductions for state and local personal property, sales and income taxes are now limited to $10,000 annually. Second, mortgage interest deductions are now capped on mortgage values of $750,000 vs. a previous cap of $1 million. The mortgage interest cap applies only to any new home purchases, not to existing indebtedness.

---

The new tax bill is still messy and complicated. And despite campaign promises to the contrary, you will definitely not be filing your taxes on the back of a postcard. The good news is for the vast majority of Americans, and US businesses, taxes are getting a definite cut in the New Year. To see how this all adds up, check out how the new tax bill affects 8 American families based on income and geography.

If you have questions or concerns about any of these, I definitely recommend speaking with a personal accountant to see exactly how your family will be impacted.  For more Family Finance tips, be sure to follow our Family and Personal Finance board on Pinterest or join our Family Finance Moms private group on Facebook.

Love it? PIN THIS!

SaveSave

SaveSave

SaveSave

SaveSave

SaveSave

Thank you for sharing!