The House passed the final version of the Republican tax bill on Wednesday, capping off a furious seven-week push to bring about the most sweeping changes to the US tax code in decades.
The bill reduces the corporate tax rate to 21% from 35%, and most – but not all – Americans are likely to see a smaller tax bill. Following is a transcript of the video.
Lauren Lyons Cole: It’s official: tax reform is happening. Now all that’s left to do is figure out what that means for your money.
One of the most important things that will be changing is your tax bracket. Whether you’re a single filer or a married person who files jointly, separately, head of household, your tax bracket will be new in 2018. Most Americans will see their tax bracket decrease as a result of tax reform, but the only way to know for sure is to compare your current tax bracket to what your tax bracket will be next year. Business Insider has put together some helpful charts so you can look at them side by side. The highest earners will see their tax bracket drop from 39.6% in 2017, to 37% next year, and so on down from there.
Another big change is that personal exemptions have been eliminated, but your standard deduction will be larger as a result. For single filers, this means you get to deduct $US12,000 and married couples can deduct $US24,000. Unless of course you itemize, in which case that’s an entirely different ball game.
Your tax bracket is important, but it doesn’t tell the whole story of how your taxes will change next year. Many people misunderstand how taxes are actually calculated. First you have to figure out what your taxable income is, so that means taking your salary and everything you earned, subtracting out any deductions that apply. For most people, that means taking the standard deduction. And then that leaves you with your taxable income.
From there, you apply it to the tax brackets in kind of a step up fashion. So everybody pays 10% on their first $US9,000 or so of income for single people, or $US19,000 or so for married people, and then you move through the tax brackets until you end up in your final tax bracket. So if your bracket is at 25%, you only pay 25% in taxes on the income you earn that fits into that bracket. That’s a good thing. Overall, it means you’re paying a little bit less tax than you think you are.
We know tax maths can be hard, so at Business Insider we’ve done the maths for you. We’ve broken down how your taxes might change next year based on the job you have now or the income you make now, whichever way is easier for you to think about it.
Let’s take an example of a fast food worker who makes about $US20,000 a year. A single childless taxpayer in that situation would see a tax cut of about 19% for the year.*
Let’s say you’re a computer programmer earning about $US85,000 a year. You’ll still get a tax cut, but it will be a little bit smaller on a percentage basis, we’re looking at about 7% back next year.*
Not all taxpayers will get a tax cut under this plan. An anesthesiologist who’s single and childless and making around $US270,000 a year will actually end up paying 10% more once this bill goes into effect.*
Whether you expect to get a tax cut or to pay more in taxes next year, there are certain things you can do before December 31 to minimise your tax bill for 2017.
Since tax brackets will be going down next year, and many itemized deductions will be eliminated or limited, it’s really smart to take as many deductions as you can before December 31. So for example, if you own a home you can pay next year’s property tax bill now and deduct it on your 2017 tax return. That’s bound to save you some cash.
If you need to buy a new car, you’re better off doing it before the end of the year so that you can be sure to deduct all of the sales tax you pay on that purchase on your 2017 tax return.
Self-employed people and freelancers don’t have to finish paying their 2017 taxes until January, but you’ll definitely benefit from making that final payment before December 31.
And one great way to reduce your tax liability which you can always do is to contribute to charities. So when you’re thinking of any end-of-year tax planning strategies that’s a great one to keep in mind.
Overall, this is the first time the US tax code has changed significantly in over three decades. There’s going to be a big learning curve next year, but the good news is nothing will really impact your taxes until you file your 2018 taxes in 2019. There’s plenty of time for us to all figure out what this means for our money.
* Career site Zippia provided Business Insider with data breaking down how different occupations fare under the finalised tax plan. The estimated federal tax savings are for a single, childless taxpayer who owns a house valued at three times their salary. Zippia’s calculations factored in whether a given taxpayer would benefit most from taking the standard deduction or itemizing deductions.
Business Insider Emails & Alerts
Site highlights each day to your inbox.