Tax Reform Is Officially Here: How The Final Tax Bill Will Affect Your Family
On Tuesday afternoon, the House passed the tax bill; late on Tuesday night, the Senate passed it as well. However, due to Senate budget rules, the House will have to vote on the bill again; they're expected to do so today. President Trump has said he wants to sign the bill into law before Christmas. In other words, for better or worse, tax reform is coming. Here's what parents need to know.
1. The standard deduction will increase. Under current law, the standard deduction is $6,350 for a single person and $12,700 for a married couple. When the new tax bill is signed into law, the deduction will double to $12,000 for single people and $24,000 for married couples. However, the new law will eliminate the $4,050 per-person personal exemption. This is good news for some people, but could hurt families with three or more kids, as you'll no longer be able to claim the exemption for yourself or any of your dependents.
2. The child tax credit (CTC) will increase. To offset the costs of eliminating the personal exemption, the new tax law will increase the CTC. The current law allows families $1,000 per child to lower their tax burden; the new tax plan will double that. However, to qualify for the tax credit, you have to owe a high amount of federal taxes, meaning that the poorest families in the country — who would benefit from the credit the most — don't get to take full advantage of it. In a small victory for low-income families, Marco Rubio was able to secure a slightly more robust CTC in the most recent Senate bill by increasing the refundable portion of the CTC from $1,100 to $1,400. The Washington Post has a good breakdown of how it might impact your family, depending on your income level.
3. The health insurance mandate will be eliminated. Under the Affordable Care Act (ACA), everyone must purchase health insurance or pay a fine. The new law eliminates the mandate. While this might be good news for healthy individuals who don't want to pay for health insurance, experts worry that this will destabilize the individual health insurance market, cause premiums to skyrocket and lead to 13 million people losing their health insurance by 2027.
4. Your tax bracket may change. The House tax bill proposed cutting down the number of tax brackets from seven to four; the Senate will proposed keeping seven. The final bill maintains seven tax brackets but does change them. Reuters has a detailed picture of the new tax brackets. While most people will see an immediate tax cut, it'll be a short-lived victory, as all personal cuts and provisions in the bill are set to expire in 2025.
5. You can deduct more medical expenses. Another temporary benefit (remember, all of the personal tax cuts will expire in 2025). That said, this is good news for people who regularly spend a lot of money on medical expenses. Current tax law says you can deduct out-of-pocket medical expenses that exceed 10 percent of your adjusted gross income (AGI). The new bill will lower the ceiling to 7.5 percent of your AGI.
What's Not Changing?
Both the House and Senate toyed with eliminating or changing some popular deductions including tuition waivers for grad students, the adoption tax credit, and dependent care accounts. After a swift and severe public backlash, Congress opted to maintain most of these deductions, including:
- the adoption tax credit: Earlier iterations of the House bill proposed eliminating the adoption tax credit, which allows adoptive parents to recoup about $13,000 in expenses. However, that didn't make it into the final bill.
- tuition waivers: University and college employees who receive reduced tuition aren't taxed on that income; as the New York Times reports, this is helpful for grad students, who often receive tuition waivers in exchange for teaching or conducting research at their school. The House had proposed taxing these waivers as income; ultimately, that didn't make it into the final bill.
- capital gains taxes when selling a home: Selling your home? Under current law, individuals can exclude up to $250,000 in capital gains taxes and married couples filing jointly can exclude up to $500,000 when you sell your home for a profit as long as you've lived in it for two of the last five years. Both the House and Senate bills proposed making the rules more strict; however, the final bill maintains the current rules.
- teacher deductions: Teachers can deduct up to $250 in job-related expenses. The House bill scrapped the deduction; the Senate bill doubled it. In the end, neither provision made it into the final bill, so the current $250 cap will remain as is.
What Happens Next?
Due to the budget rules, the Senate made some minor tweaks to the bill late Tuesday night; however, because the House and Senate have to pass the exact same bill, it now goes back to the House for a re-vote. It's expected to pass, at which point, President Trump has said he'll sign it as soon as possible. Confused or worried about how the bill will impact your family? The New York Times has a detailed tax bill calculator that may clarify things for you.