There’s a lot of uncertainty about the future of the tax code. Whether you got a big fat refund this year or had to pay a tax bill, you may be wondering: will taxes go up or stay the same over the next few years. That’s a tough nut to crack in general terms, but here’s a primer to some of the changes being proposed (the key word being proposed).
Overall, the Trump Administration is floating a plan that calls for paring down the seven existing personal income tax brackets (10%, 15%, 25%, 28%, 33%, 35% and 39.6%) to three (12%, 25%, 33%).
The anticipation is that most taxpayers will fall into one of the two lower categories. At the same time, personal exemptions will be eliminated in favor of more than doubling the standard deductions from $6,300 for single filers to $15,000 and from $12,600 for married joint filers to $30,000. Itemized deductions would cap out at $100,000 for single filers and $200,000 for married couples filing jointly.
The expectation that American workers would pay lower taxes under the proposed changes depends on a number of different criteria, including filing status (head of household for example) and earned income.
Will Your Taxes Decrease?
Under the proposed changes, it’s generally expected that average taxes would decrease, according to the Tax Foundation. One of the most obvious changes is that those currently paying 35% or 39.6% tax on their income would be shifted down into the category that will be taxed at 33%. It’s expected that the top 1% of high-income taxpayers benefit the most from this change.
There is also a caveat for those at the lowest end of the spectrum. Because of the proposed plan’s higher standard deduction, single taxpayers earning $15,000 or less, or a married couple filing jointly earning $30,000 or less, could claim the standard deductions (which exceed their income) and therefore pay zero taxes.
Will Your Taxes Increase?
Because of the reduction of tax brackets, middle income tax payers might pay more if they are shifted into a higher tax bracket (for example, being in the 28% bracket now and shifting into the new 33% bracket later).
Head-of-household payers could also see a rise due to the elimination of the head-of-household deduction. Single parents would probably feel the burden the most. For example, a single parent with three children could lose more than $10,000 in deductions under the proposed plan’s calculations.
Suffice to say, the question of whether you will pay more taxes, less taxes or stay the same is exceedingly complicated. So let’s talk about your situation – Kenneth.Bagner@sobel-cpa.com.
Ken Bagner is a member of Sobel & Co. LLC. He is a member of the American Institute of Certified Public Accountants and the New Jersey Society of Certified Public Accountants. Plymouth Rock Assurance in NJ is proud to partner with NJCPA to bring you valuable tips about your financial health. Qualified members of the NJSCPA can receive a discount on their car insurance through Plymouth Rock Assurance in New Jersey.