When a $1.5 trillion tax bill — and the most significant tax reform over the past three decades — became law at the end of 2017, it left most Americans wondering exactlyhow they’d be impacted.
The answer to that question still remains fairly complicated, or yet to be seen in many circumstances.
We asked a few experts to explain what the new changes to the tax code mean for families: what families can expect in terms of cuts and benefits, the biggest changes going forward, what will happen in 2025 and how to prepare for the future.
A Tax Cut for Most
“For the vast majority of families, this bill will mean less tax for their household, so more take-home pay,” notes Austin Carlson, a tax lawyer and CPA at Gray Reed & McGraw LLP in Houston, Texas. “Among non-partisan analysts, there is agreement that about 80 percent of households will see a tax decrease. Ten percent will see an increase — these households are generally more affluent, particularly those that are in high-income tax states like California, New York and Illinois.”
Richard M. Prinzi, Jr., CPA and co-founder of F-Sharp Tax Management Services, concurs.
“Most families will see a reduction in their tax liability in 2018,” he says. “As many low-income earners with a family currently get money back at tax time and don’t owe money, they should expect to get a little more. Most should see an additional $1,000 when they file their tax return. For the working class, the withholding rate will change in March, allowing for an increase in their paycheck even if the amount paid is the same. So, if you make $600 a week and take home $430 currently, you will still make $600 per week; however, your take-home will go up to $450. Might not seem like much, but it is $1,000 per year in extra spending money.”
Since every family’s financial situation obviously differs, the amount of money potentially saved is relative depending on several factors: the state you live in, whether you have children (and how many), whether or not you own a business, how much debt you have, if you own a home and so on.
Pros and Cons
Douglas S. Reiling, CPA and manager of public accounting firm Oelerich & Associates, emphasizes the existence of pros and cons for families considering the aftermath of this bill.
“Most families can expect to receive a small tax cut for 2018, and families will see the increase in after-tax income on their paychecks during 2018,” he says. “Working class families will benefit, as the child tax credit doubles from $1000 to $2000, with as much as $1400 of that being available even to families not making enough to have a federal tax obligation. Middle-class families will also benefit from that credit and may find that they no longer need to itemize deductions to maximize their tax savings due to a larger standard deduction. Wealthy families will reap huge benefits from lower top tax rates, a much higher threshold for the Alternative Minimum tax, and an enormous estate tax exemption.”
The cons? Like Rae suggests, certain families will indeed pay more, particularly if they live in states with higher taxes. According to Reiling, anyone with a family-owned business will face more complicated taxes, and with the removal of the insurance penalty, insurance premiums are expected to rise sharply as well.
Homeowners in Expensive States
Take one expert’s approach: “Initially, it is expected that most families will see some type of tax cut,” agrees David Rae, a certified financial planner and the founder of DRM Wealth Management. “Some families we’ve talked to are expecting to save just $10 per year. It is expected that most families will see their taxes go up by the end of this plan, meaning, this will not be a miracle for the middle class. Homeowners in expensive states like NY or California will likely get screwed royally by the limiting of the state and local tax deduction.”
Though there are numerous elements of the tax bill that any family could potentially be subject to, there are several important changes specific to families that most experts categorize as factors that will absolutely impact 2018 tax returns.
These include the standard deduction increase and personal exemptions repeal, the Child Tax credit increase, the reduction in income tax rates as a whole and the change related to 529 education savings plans. Let’s break it down.
The Number of Tax Brackets Stays the Same, but Rates Widen
“The decrease in tax rates will result in the clear majority of US taxpayers having a lower tax liability in 2018 than in 2017,” clarifies Lee. “At the same time, the range of incomes subject to each tax rate will increase in 2018. The 10 percent rate for married filing joint couples is currently for taxable income of up to $18,650, but in 2018, it will be for taxable income to $19,050. Further, the 28 percent bracket becomes the 24 percent bracket and the income range moves from $153,100-$233,350 to $165,001-$315,000. The widening of tax brackets will also decrease the tax liability of the vast majority of American taxpayers. The only income range seeing a rate increase is incomes from $400,000-$416,700 (married filing joint) who will go from 33 percent to 35 percent.”
What Does All of This Mean?
Primarily, it’s supposed to make sure people withhold the right amount, landing in the sweet spot between receiving a huge refund and owing the government a huge amount of money.
“A higher standard deduction means fewer people will itemize their deductions, which include funds paid for items such as state, local and property taxes, mortgage interest paid, and charitable donations,” says James Lee, financial advisor and CPA of Cedar Valley Tax Services. “Fewer itemized deductions should simplify tax preparation, but it will also catch some unprepared individuals who previously itemized deductions and will take the standard deduction going forward.”
One Step Forward, One Step Back
Brian Ashcraft, director of compliance at Liberty Tax Service, says, “The tax law nearly doubles the standard deduction, but it also eliminates personal exemptions. This means that taxpayers will not be able to claim the personal exemption for themselves, their spouse, and for each qualifying dependent. The personal exemption had been set to increase to $4,150 [from $4,050] for the 2018 tax year. This could decrease the deductions available to large families that meet income limits.”
For example, says Carlson, if you were married with one kid and previously took the standard deduction, the effect of the two cancels out, as the savings from this tax plan comes from lower rates. If you used to itemize, and your itemized deductions weren’t over the standard deduction amount, you probably wouldn’t itemize next year.
The standard deduction increase is technically supposed to offset the lack of personal exemptions in 2018 onward, says Lee, but the “loss of personal exemptions for children and other dependents is not accounted for.”
Rae calls the value of the standard deduction increase “modest, saving the average family just $15 to $20 per paycheck, if even that much.”
Lee calls the child tax credit expansion a “very valuable change for parent taxpayers,” and an attempt to help further close the gap. The credit nearly doubles to $2,000 per qualifying child under age 17, and up to $1,400 is refundable.
“This means that, all things being equal, larger families may have a higher taxable income under the new bill,” says Reiling. “For most working families, this increase in taxable income and tax should be offset by the higher child tax credit noted above, at least until their children age out of the child tax credit.”
More Families Can Qualify
“The law also makes the credit available to more families by increasing income eligibility for the credit,” says Ashcraft. “For 2017, married taxpayers filing jointly could claim the full credit if their adjusted gross income (AGI) was $110,000 or less. Under this law, joint filers with an AGI of up to $400,000 can claim the full credit.”
Carlson calls this a “significant bottom-line difference to households with working parents and children,” and Rae says it could be huge for families with lower incomes and large families.
Current law prevents both earnings and distributions in 529 plans to be federally taxable if used for college costs, but with the new tax law, the same benefits apply to any taxpayer using 529 plans for elementary, secondary and home schooling.
This mostly helps parents of children attending private schools, says Lee, but Rae suggests the tax savings for higher-earning families could be substantial in terms of avoiding taxes on later growth and gains.
Biggest Benefits for the Middle
“Lower-income families will see a smaller proportional benefit than middle- and upper-income families,” says Lee. “The benefit skews towards the upper-middle and upper-income families, but most families will see a net benefit.”
“Most families can expect a tax cut, but the increase in after tax income is not expected to be uniform across families of varying socioeconomic statuses,” argues Reiling. “Lower income working families will see both the smallest dollar and percentage increase in their after-tax income. Wealthy families will see the largest dollar and percentage increases in after-tax income. I have yet to see a respectable analysis of this bill that suggests anything else.”
Carlson says households under $150K of income can anticipate anywhere between $500 and $2,000 more take-home pay next year, but those same households could also see a tax increase — again, depending on states with major property and income taxes — so the results will vary.
Complications of Brackets
Prinzi warns against using broad terminology as a catch-all to describe how the tax bill impacts families based on gross amount of income earned.
“I assure you: a family of four earning $100,000 per year will not be middle-class families in many places. If you live on the east or west coast, you are working class or lower-middle class,” Prinzi said. “In many places in the middle of the country, you are upper-middle class. The cost of living is not factored in gross income. This is how the same person can go on different news shows and say the middle class families are going to see $1,000 or $2,000 in tax savings and explain how that will affect their lives. An extra $1,000 per year in the pocket of a ‘middle-class’ family living in New York City will just be a slight decrease to their credit card balances. The same annual savings in Ohio will create additional disposable income.”
Families with younger children will fare best under the new plan, due to the child tax credit and eligibility for 529 plans, but those with a large number or none at all are likely to witness the biggest changes. Think of it this way: the more children you have, the more you can take advantage of both the child tax credit itself and the increased refundability.
Yet, Reiling says a potential pitfall involves age. “As kids get older, they no longer qualify for the child tax credit. If that’s the only thing protecting them from the loss of their personal exemptions, families may see a tax increase for the last few years children live at home.”
It’s critical to remember that no tax law lasts forever, and they’re often changed or extended depending on national leadership and current administrations. Right now, the recent tax reform laws are set to expire in 2025, and if that happens without any modifications or extensions, then almost all taxpayers will see an increase.
“Congress has a track record of extending many tax cuts, especially for lower- and middle-income households,” says Carlson. “I would be very surprised if taxes went up due to Congressional inaction.”
Rae adds that in his opinion, the worst case scenario involves families getting used to spending more money — because then if taxes do increase, they end up worse off than they were before.
Predicting the Future
Reiling says it’s challenging to predict what 2025 and beyond will look like, but he expects changes to the tax code between now and then.
“If the cuts are still largely in place at that time, conventional wisdom says it’s very difficult politically to allow them to expire for the working and middle classes,” Reiling said. “As for the tax cut supposedly paying for itself, I have yet to hear a respectable economist even come close to agreeing with that. Even with really rosy projections of economic growth, this thing will require borrowing $1 trillion or cutting government services by $1 trillion. So if the deficit and related debt have swollen as expected, it’s also possible that these cuts will be rolled back and then some. It’s anyone’s guess.”
Experts unanimously agree families should go above and beyond to prepare for the impact of the new tax bill by checking with their CPA, attorney or tax advisor to discuss possible implications in 2018. Ashcraft emphasizes the complexity of the new law, despite claims it is supposed to make things simpler for taxpayers, and Lee encourages people to think through all sorts of variables.
“Will I itemize or take the standard deduction?” asks Lee. “How much will my tax liability change when I take the standard deduction rather than itemize? What happens to my tax liability when my child turns 17 and then joins the military (no longer a qualifying dependent) at 18? Should my business buy a new piece of equipment and expense it or depreciate it? Should I change my business from an LLC to a C-Corp? There are endless questions and situations that arise when tax reform occurs, so this really is the best time for people to make the most out of an accountant’s experience and knowledge.”
Rae concurs: “Nothing could be worse than waiting until you file in 2019 — and realizing you owe thousands of dollars to the IRS. It is never fun to owe a ton in taxes, but even worse when you get penalized with penalties for underpayment. This is a great time to get your financial house in order. If you are lucky enough to be paying less in taxes, use this opportunity to pay down debt, increase your 401k contribution, or even top off your emergency fund. Act now — the benefits won’t last forever.”