THIS IS NOT A POLITICAL DISCUSSION. Whatever you believe about who should pay how much taxes or what tax cuts may do for the economy, this is not the place to discuss that. This is just a discussion of the effect the reform may have on a fairly simple individual return.
I was curious what the current tax plan would do to my own taxes. Most changes won’t hit until 2018 but I ran a comparison as if it was in effect for 2017.
TLDR at the bottom
Obviously this affects high state income tax people more than others. Your mileage may vary.
I live in California, so high state income taxes. My mortgage is under $500k and my property taxes are under $10k. This means I get to keep my itemized deductions except for the state income tax. (Technically I’d get to keep my mortgage interest deduction since I bought the home before the bill date, but people buying homes now will be limited... and in my area, you can’t buy a one bedroom single family home for under $500k... and rents are insane).
The standard deduction is high enough that without the state income tax deduction, the standard deduction is higher. This means I get no tax benefit by owning my home or donating to charity (unless I donate a lot more)
Whether you think homeowners should get a tax break or not, this will affect new home buyers. If you own and want to sell or are looking to buy, the amount of home someone can afford has just decreased. This could be good or bad, just stating a fact.
The bigger hit is that I lose my personal exemptions. I am married with one child.
The other hit is that I lose my dependent care FSA deduction. The tax credit is higher now but nowhere near enough to make up for the FSA.
I will pay about $3,000 more under the tax reform bill.
Will this raise your taxes? If you were paying AMT before? Probably not. If you were not paying AMT and didn’t itemize? Depends on how many personal exemptions you had. If you were not paying AMT and itemized, you are likely going to see an increase. If you also have kids, watch out!
AMT, for those who don’t know, is literally an alternative minimum tax. It’s like a separate tax code to calculate the minimum tax someone should owe. If it’s higher than regular tax, you owe AMT to catch you up. The rules are a little different. The two biggest changes that usually put people in AMT are that you lose your personal exemptions and can’t deduct your state income taxes. After a few other adjustments/limits, you pay 26% flat tax.
Guess what the tax reform bill does? Takes away everyone’s personal exemptions and state income tax deductions then taxes them at a progressive tax that hits most people who were in AMT before at the 25% bracket.
So if you were in AMT before, you don’t lose any additional deductions, actually get back some of those limitations mentioned before, and have a lower tax rate than before.
If you were single and took the standard, you simply trade your personal exemption ($4,050) and for a higher standard deduction (an extra $6,000) so you come out ahead. If you were married before and took the standard deduction, you trade your personal exemptions ($8,100) for an extra ($12,000) standard deduction. If you also had a kid, now you give up your personal exemptions ($12,150) for the extra ($12,000) deduction. Add more kids, it gets worse and the FSA loss makes it even worse.
A couple making $300,000 whose only deduction is a high state income tax may pay $15,000 less in taxes.
Who knows what the final bill will be. But do the math on your own return so you can plan and know how it will affect you! If you have more than just W2s going on, this may all be very different.
TLDR; they are getting rid of AMT by putting everyone in it. If you were paying it before, this will probably be better. If you never itemized and have no kids, probably a little favorable.
Submitted November 04, 2017 at 03:13AM by WinterOfFire http://ift.tt/2zchGQ1
