The new tax code was signed into law at the end of 2017. It is the biggest tax overhaul in over 30 years, and the changes caused some controversy. Many people focused on the different iterations of the tax code before it was voted into law. However, knowing how the tax code actually impacts you now (and how it might change in the future) is key to setting up a successful financial plan. Here are three big ways the tax code might impact you:
#1: Increased Standard Deduction
The first (and biggest) change to the new tax code is the increased standard deduction. Previously, the standard deduction for individuals was $6,350 and $12,700 for married couples filing jointly. The new tax code has essentially doubled the standard deduction – and it now sits at $12,000 for individuals and $24,000 for married couples filing jointly.
Of course, just because the deduction has increased doesn’t automatically mean you’ll be able to save money on your taxes. Other tax-saving deductions have been eliminated from the new tax code, which this increased standard deduction is intended to make up for. However, it is good to keep in mind if you typically itemize your taxes, because the standard deduction may be more beneficial when you file next year.
#2: Elimination of the Personal Exemption
The personal exemption tax deduction used to be adjusted each year for inflation. It acts as a way to claim yourself, your spouse, and any children or dependents where applicable. By “claiming” people as dependents on your tax return, you would get an exemption that acted against your total amount of taxable income. In 2017, the personal exemption was $4,050 per person. However, the new tax code eliminated the personal exemption.
For many families, this will be made up for by the increased standard deduction. However, for large families with many children or dependents being claimed, this change could act against you when trying to create a tax saving strategy.
#3: Change in Tax Rates Across All Brackets
The final big picture change you should watch out for is the change in tax brackets. In 2017, the tax rates for each bracket were: 10%, 15%, 25%, 28%, 33%, 35%, and 38.6%.
In 2018, the new rates are: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. This change is a small one, but it could potentially offer more tax-savings when you file for 2018.
What Does This Mean?
The idea behind the new tax code was to simplify the act of filing your taxes, while encouraging the standard deduction and hopefully saving the majority of people some money. Like most things in politics and finance, whether this outcome was achieved is unique to every person’s financial situation.
It’s important to know how to implement tax-saving strategies when it comes to your large-scale purchases (like buying a home), charitable donations, and more. The new tax code might change what you can and should be doing with your money, and being aware of the changes will help you develop a financial plan that’s right for you.
For more information on tax changes and more, check out the guide from the College for Financial Planning for an overview.