You may know already that the US Congress passed a new massive tax law in December which affects virtually every American. If not, here’s a short summary:
New Tax Law Is Massive
This year’s new tax law is the largest in American history and it impacts virtually every industry and sector of the economy. If you’re in a higher tax bracket, you’ll likely see an increase in your tax payments. But if you’re in a lower tax bracket, you may pay less tax than you previously did. In general, this new law lowers your taxes. But it also adds a lot of new requirements and restricts your activities in various ways. As before, the new law is called the ‘ATC’ or ‘American Tax Cuts Act’ and it is also known as the ‘Tax Reform Act of 2017′. It is a combination of the ‘Pass-through Business Tax Reduction’ and ‘Penny Plan’ provisions of the Trump administration’s proposal which was passed by the United States Congress in October.
Massive Tax Reform Is Affecting Every American
The new tax law is so big that even Congress initially had difficulties in fully understanding its implications. The New York Times wrote an entire article on this issue.
The Times’ article points out that many Americans have to pay more tax under the new law. This includes individuals who are in a higher tax bracket, married couples who file a joint federal income tax return, and corporations. Even small, local businesses will see a substantial increase in their tax obligations due to the new law. Those in a lower tax bracket will likely see a decrease in their tax payments as a result of the new law. But for many Americans, including business owners, the benefits of the new law significantly outweigh the costs (if any).
Many individuals, families, and businesses will see an increase in their tax payments under the new law. But many more will see a decrease in their tax bills. This is mainly because of the reduced rates on most forms of income, including salaries, rents, dividends, and capital gains. As a result of these reduced rates, many more taxpayers will be able to file their taxes in a simpler manner, so it’ll take them less time to file their taxes. This, in turn, could lead to a substantial reduction in their tax burden. Businesses will benefit from the simplified tax rules, as well. They’ll save money in various ways, including hiring more people, expanding current operations, and purchasing new equipment. Not bad for a tax law.
Besides lowering your taxes, the new tax law limits your ability to take certain deductions and it also raises the amount of income that must be included in your gross income. Here are some of the more significant changes:
Changes To Personal Deductions
Many people, including personal finance bloggers, have been speculating about the various changes to personal deductions that will be affected by the new law. If you’re in a higher tax bracket, you may want to make certain adjustments, including lowering your mortgage interest deduction, because your house now serves as your biggest asset. While you’ll want to make the most of your home’s increased value after making these necessary adjustments, you also don’t want to push your luck and risk having the IRS come knocking on your door. If you’re in a lower tax bracket, you may want to consider raising your mortgage interest deduction or your individual exemptions as a result of the changes to these personal deductions. These changes could dramatically reduce your tax burden. However, you’ll want to make sure that you’re careful not to ‘overdo’ it and go against IRS rules. In either case, these are some adjustments that you should make as a result of the new tax law.
Raising The Amount Of Income That Must Be Included
This new law will also require you to include more of your income in your gross income. The current law already required most taxpayers to include most of their income in their gross income. But the new law will raise the amount that must be included from 77% to 95%. For some, this can dramatically increase their tax burden. If you make less than $200,000 per year from your business or profession, this may not sound like much to you. But for many, it will be a significant increase in their tax obligations. For example, if you’re in the 33% tax bracket, you’ll now have to include 83% of your income on your taxes rather than the existing 77%. For some, this could mean an increase of about $26,400 in their annual tax burden. It’s a common misconception that people who make less than $200,000 per year don’t have to pay much in taxes. Although this may be true for some individuals, it’s far from the case for most. Those in the 33% tax bracket will likely have a significant increase in their tax obligations as a result of this new law.
Lower Rates For Most
It’s important to keep in mind that not only do we have the new tax law, but we also have the new administration which significantly cut taxes. For most individuals, this means a reduction in their marginal tax rates and a broadened tax base. If you’re in a higher tax bracket, you’ll likely see an increase in your taxes. But for those in a lower tax bracket, it could mean a significant decrease in their tax burden. For example, if you’re in the 33% tax bracket, you’ll likely see your taxes reduced by about $2,600. In the case of business owners, it could mean an increase of about $13,700 in their after-tax income, which would make their lives a whole lot simpler and less stressful. This is because the new law will dramatically reduce the amount of time and hassle they need to spend in handling their business taxes. Not bad for a tax law.
To be clear, this new tax law is not all good. There are a number of changes that may affect you and your family in a negative way. If you’re in a higher tax bracket, you may want to make certain adjustments, including lowering your mortgage interest deduction, because your house now serves as your biggest asset. While you’ll want to make the most of your home’s increased value after making these necessary adjustments, you also don’t want to push your luck and risk having the IRS come knocking on your door. Not all of your personal possessions will be deductible, as well. The law does allow for some flexibility, so you may want to consult a tax attorney if you have any questions about how the new law affects you personally.