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Now that the House and Senate have passed the $1.5 trillion tax bill, which President Trump is expected to sign into law soon, millions of Americans are wondering how the new rules will affect their finances.
In the near term, not a lot will change, since most provisions in the new tax law won’t apply to your 2017 taxes. But your 2018 taxes may look quite different depending on where you live, whether you have kids, and other factors.
Among the major changes: The new bill nearly doubles the standard deduction and hikes the child tax credit. In addition, the deduction for state and local taxes and property taxes will be limited to no more than $10,000. And the mortgage interest deduction is limited to mortgage debt of no more than $750,000 vs. $1 million previously. (If you took out a mortgage before Dec. 15, 2017, you can still deduct interest on up to $1 million.)
For most filers, these changes are likely to result in lower taxes for the next few years. A recent study by the Tax Policy Center, a research group, found that on average all income groups would see a tax cut in 2018 and 2025, the last year before the tax cuts for individuals expire.
That said, the wealthiest taxpayers will benefit most. In 2018, someone in the top 1 percent (income of $732,800 or more) would get an average tax reduction of $51,140, or an income boost of 3.4 percent, the Tax Policy Center found. By contrast, someone in the middle quintile (income between $49,000 and $86,000) would receive a tax cut of about $900, or 1.6 percent.
The big winners also include corporations, whose taxes will be lowered from the current top rate of 35 percent to 21 percent. That tax cut is permanent, while the individual tax breaks are scheduled to expire after 2025. As a result, by 2027 some 53 percent of filers would be paying more in taxes, according to the Tax Policy Center.
Those are just average numbers, of course, and they may not tell you much about how your family will fare under the new law. So we revisited our analysis of earlier versions of the tax bill, which looked at the impact of the rules on several specific but representative households, to see how things change under the final bill.
Once again we asked Phillip Schwindt, principal tax research analyst at Wolters Kluwer, a tax software and information company based in Riverwoods, Ill., to help us update the numbers for our hypothetical families.
These scenarios may offer insight into your own situation. And at the very least, you may get a better understanding of how the new tax law works and how it may affect your financial plans.
Download this PDF to see details of how we arrived at our figures.
Editor's Note: For the most part, these scenarios are based on average figures for income, home prices, and other factors, provided by the Internal Revenue Service, the Bureau of Labor Statistics, and other sources. In these examples we assume that each household has private health insurance, except for the retired couples, who are insured by Medicare.
Consumer Reports is an independent, nonprofit organization that works side by side with consumers to create a fairer, safer, and healthier world. CR does not endorse products or services, and does not accept advertising. Copyright © 2017, Consumer Reports, Inc.
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