After months of drafting, revising and voting, tax reform is here.
When the plan passed in the Senate earlier this month, parts of it were significantly different from the plan passed in the House of Representatives in November.
The two groups of lawmakers came together to create one bill they thought was the best of both worlds. On Friday morning, President Trump, who touted it as a Christmas gift, signed it into law.
“95% of Americans will pay less or, at worst, the same amount of taxes (mostly far less),” Trump tweeted after signing the bill.
“The Dems only want to raise your taxes,” he added.
Let’s take a look at what the new law will mean for all of us.
Here’s What’s in the Final Tax Bill
The New York Times and Politico both created breakdowns of how the bill compares to our current tax laws. Here are the most important differences:
Individual Taxes Will Go Down, but There Are Still 7 Brackets
One of the early promises was the new tax code would simplify the tax brackets from seven to four. That didn’t happen in the final bill.
When you file your taxes under the new bill, there will still be seven brackets that range from 10% to 37%. The current tax code requires that Americans in the top income bracket pay 39.6%.
While the number of brackets won’t change, taxes will be lowered across the board. At least for now. Most of the individual tax cuts will disappear in 2025.
Corporations Will Pay a 21% Tax Rate
Although individual tax breaks are temporary, the corporate tax cut is permanent in the bill headed to Trump. Early plans said businesses would pay a 20% rate. The final plan bumped that up to 21%. Under current law, the top corporate tax rate is 35%.
Proponents say this cut will create more jobs with higher wages. But critics say workers won’t see the benefits. Instead, they say, it will only widen the wealth gap by concentrating more money in the hands of the rich.
Standard Deduction, Child Tax Credit Will Double… for Now
Temporary changes are coming to what deductions and credits you can claim when you file your taxes.
As promised, the standard deduction — the dollar amount those who don’t itemize their deductions can subtract from their taxable income — will nearly double.
In the past, single filers could deduct $6,300, and joint filers could deduct $12,600. Those deductions jump to $12,000 and $24,000 respectively.
The child tax credit will double from $1,000 to $2,000 and will also come with a larger refundable portion that will likely be helpful to lower-income parents.
Homeowners can expect the mortgage interest deduction to change as well. The new bill limits the deduction to the first $750,000 of mortgage debt for homes purchased after Jan. 1, 2018. The current law capped it at $1 million.
This will impact wealthy Americans who own expensive homes across the country and middle-class people in large cities like New York City and Los Angeles, where even middle-income people are forced to pay high prices for homes.
All three of these changes will expire in 2025 as well. If no additional laws are passed to extend them, the standard deduction increase, the child tax credit increase and the mortgage interest deduction cap will all revert back to where they are now.
Finally, graduate students will be glad to learn that plans to tax tuition waivers as income didn’t make the final bill.
When Will These Changes Take Effect?
Tax season is almost here again. In the next few months, we’ll all be gathering up our W-2s and other payment documents to calculate how much we owe the government or how much we’ll get back.
During this tax cycle, the old rules still apply. The new law will impact how we pay taxes on our 2018 income.
Desiree Stennett (@desi_stennett) is a staff writer at Codetic.