A look at the Republicans New Tax Plan
The Tax Cuts and Jobs Act signed on the 22nd of December 2017, will usher in changes in 2018 There are some significant changes to existing tax rates, affecting both businesses and individuals. For some it may be good news and for others it may be a mixed bag. There is a reduction in income tax rates and an increase in standard deduction, but personal exemptions have been done away with. Corporate tax rates have been slashed substantially. The Republicans’ tax plan has sanctioned permanent corporate tax cuts and temporary cuts in individual income tax rates.
Single individuals will be charged 10%, 12%, 22%, 24%, 32%, 35% and 37% respectively for income groups $0 to $9,525, $9,525 to $38,700, $38,700 to $82,500, $82,500 to $157,500, $157,500 to $200,000, $200,000 to $500,000 and over $500,000+. Married couples or those filing for joint income tax will be charged the same tax rates for income groups $0 to $19,050, $19,050 to $77,400, $77,400 to $165,000, $165,000 to $315,000, $315,000 to $400,000, $400,000 to $600,000 and over $600,000.
The first slab remains unchanged. There is a reduction of 3% for second and third slabs, 4% reduction in the fourth slab, 1% reduction in fifth slab, no change in the sixth slab and more than 2% reduction in the seventh slab. All the seven slabs and their corresponding tax rate cuts would continue till 2025. The tax rates would revert to 2017 rates should there be no review. The fact that the slabs remain unchanged is disappointing because they do not account for inflation. The government should have considered reviewing the income range.
Single or individual taxpayers can claim double the standard deduction now. Instead of $6,350, you can claim up to $12,000. The same deduction for joint or married filers has been increased from $12,700 up to $24,000. These changes will also revert to the 2017 standard deductions after 2025. This is possibly one of the most noteworthy changes in the new tax plan. Most people would be happy to claim the deduction and almost no one will claim anything short of the maximum.
The devil is in the details and that is where the tax plan gets interesting. Families with more than one kid will likely pay more taxes regardless of the increase in standard deduction. This is because personal exemptions have been done away with. Various itemized deductions are no longer valid. Moving expenses and alimony payments cannot be deducted. There is a limit on mortgage interest and there is no deduction on interest paid on any type of lines of credit including home equity. On a positive note, there are more deductions available covering medical expenses.
The qualifying criterion to deduct medical expenses has been lowered from 10% to 7.5% of income. This will qualify more people to claim significant deductions. This deduction brings normal taxpayers in the same ambit as the seniors, who were already in that bracket. The new tax plan has also effectively repealed the Obamacare tax on everyone who doesn’t have health insurance.