I know, I know. Taxes are probably the last thing you want to talk about. I can't really disagree with you. Unfortunately, taxes are something you will need to worry about for the rest of your life. So on that depressing note, let’s learn something that will be useful to you year after year.
I want to take you through the high-level points of the "Tax Cuts and Jobs Act" to give you an idea of how this could affect your taxes and, more importantly, your take-home pay. I would also encourage you to use this nifty tax tool to get an estimate on how much extra (or less) income you could expect from the federal tax changes. It goes without saying that none of this is tax advice.
- Single filers: The 2017 tax code includes a standard deduction of $6,350. The new 2018 tax plan increases this deduction to $12,000.
- Joint filers: The 2017 tax code includes a standard deduction of $12,700. The new 2018 tax plan increases this deduction to $24,000.
Is this good for me? In a vacuum, yes. Deductions are netted against your income, which means the amount of income that is subject to taxation is lower. Ok, let's keep going.
- The current tax code includes a personal exemption of $4,050 per person
- This means for a single filer with no dependents the exemption is $4,050
- For a joint filer with no dependents, the exemption is $8,100
- The proposed tax plan eliminates the personal exemption entirely
Is this good for me? In a vacuum, no. These exemptions are also netted against your income, which means that eliminating the exemption will increase your taxable income, compared to the 2017 tax code.
Is this good for me? Generally speaking, yes. The new code maintains the 7 brackets (not the simplified 4 brackets in the initial proposal) and the rates are lower within each bracket. The income ranges are more favorable, except for a fairly narrow range in the middle. The new 24% rate starts at $82,500 for single filers and $165,000 for joint filers. This means that the average American will not go above the 22% federal income tax bracket, whereas that same American would hit the 25% bracket under the old plan.
Putting all of these together, let's take a look at a single filer with no dependents earning $65,000 in gross income
If you want to perform this same analysis for yourself, use this nifty tax tool.
Looking in the highlighted summary line, we see that a single filer with no dependents making $65,000 could save $1,675 on federal taxes next year. That's nothing to sneeze at. Keep in mind that this analysis focuses only on federal taxes since each state has its own tax structure. As much as I would love to comb through every states' respective tax code, there's only so much time in a day! If you have a specific state you would like help with, let me know and I'll see if I can help out.