One avowed raison d’être of the GOP tax reform plan is to make it easier to pay Uncle Sam. But life won’t get necessarily get easier if Congress sends a tax bill for President Trump to sign.
In addition to cutting corporate and individual tax rates, and reducing the total number of income brackets, GOP leaders have reiterated time and again that their planned reform will radically shrink the size of the 1040 form most taxpayers fill out.
In a speech last August, House Speaker Paul Ryan promised to “simplify things to the point where you can do your taxes on a form the size of a postcard.”
“Wouldn’t that be nice?” Ryan added.
The bill passed by the House, and another one under consideration in the Senate, would certainly change how much you’d pay, eliminate and reduce deductions and credits, while creating a new set of winners and losers.
- Larger standard deduction: Both the House and Senate plans nearly double the standard deduction to $24,400 for a married couple filing jointly. This change would result in only 6 percent of Americans itemizing their taxes, down from 30 percent now.
- So long, AMT: The dreaded Alternative Minimum Tax would be nixed in both GOP plans. The parallel tax system that was first introduced to ensure richer Americans wouldn’t deduct and credit their way out of paying taxes, generally affects upper income households. If you use tax software, though, you won’t see much difference since your bill is calculated automatically, anyway.
- Deduction elimination: The House bill would kill deductions for medical expenses, student loan interest and dependent care flexible spending accounts (although this was later restored), while the Senate got rid of the deduction for state and local taxes. Where that ultimately shakes out depends on which bills pass each chamber, and the how the final bill is negotiated in conference.
What’s more complicated
- Housing deduction: Getting a mortgage may be a lot more complicated if either version becomes law. The Senate plan eliminates all state and local tax deductions, but keeps the existing mortgage interest deduction. The House plan still allows you to deduct $10,000 in property taxes from your federal bill, but halves the size of a loan you can claim for the mortgage interest handout to $500,000. While both moves involve trade-offs, neither make life simpler for taxpayers.
- Child tax credits: Both plans kill the personal exemption, which would hurt the bottom lines of millions of families. To make up the difference, lawmakers increased the child tax credit (House to $1,600, Senate to $2,000), and raise the threshold of how much you can make before the benefit is phased out. The House would also allow a temporary $300 credit for non-child members of the households that would end after five years.
What you should do
Ultimately, Americans care more about what they owe than how long it takes to calculate what they owe.
Whether or not you’ll come out ahead in the tax reform debate depends entirely on your situation. Low income families or seniors who use the medical expense deduction could see a big tax hike. Middle class families with two kids could see a few thousand dollars in tax relief. Wealthier filers will get a big break.
The Joint Committee on Taxation estimates that by 2027 nearly 54 million households earning less than $200,000 would see lower taxes, while 19 million would get a tax hike.
And many of the Senate provisions aimed at you, like nearly doubling the standard deduction, would end by 2026.
Your best bet is to lower your tax bill by ramping up your 401(k) contributions, look into a health savings account if your employer offers one, and utilize other tax-free savings vehicles, like the dependent care FSA.
In case you end up on the losing end, ramp up your rainy-day fund in a high-yielding savings account to cushion the blow.
But don’t expect to save time come April, even if Congress does the unthinkable and passes a major tax overhaul.