Trump signed a new tax plan just before Christmas, formally referred to as the“Tax Cuts and Jobs Act.” This new plan is going to cut both the amount of taxes paid by big corporations and double the standard deduction of individual taxpayers. The cuts will take effect this year, and you can expect to see those new rates on your February paycheck. They’ll revert back to the 2017 rates in 2026.
What everyone really wants to know, however, is will the new tax plan save me money?
Income Tax Rates
The US tax system has seven different income categories, and the percentage of taxes you pay depends on how much you earn. If you make less than $9,525 a year, you won’t see any change at all. You’ll still be taxed at the rate of 10%. After that, the rate decreases for each tax bracket. Those making between $38,700 and $82,500 for instance, will drop from paying 25% to 22%. If you earn between $157,500 and $200,000, you’ll be taxed at the rate of 32% instead of 33%.
On the basis of the tax rate alone, you should save a little money if you earn more than $9,525 a year, or if you have a joint income of over $19,050.
Deductions and Exemptions
The new tax plan also doubles the standard deduction, which is claimed by about 94% of taxpayers. Before the changes, a single person could deduct $6,350 dollars and joint filers could take off $12,700. Those figures now stand at $12,000 and $24,000.
The problem for some, however, is that the new tax plan also eliminates personal exemptions. That’s the amount you could take off for dependants. Before the new plan, you could deduct $4,150 from your income for every person you claimed. If you have several children or other dependents that used to qualify for the deduction, the loss of this credit could wipe out any benefit you get from the increase in your personal deduction.
Some other itemized deductions have also been eliminated, including things like moving expenses (non-military) and alimony payments.
Most analysts agree that the new tax plan will help corporations and businesses more than individuals. Part of the reason for this is that the cuts are permanent for corporations but expire in eight years for individuals. It mostly benefits the wealthier, however, it should be noted that the wealthy already pay the vast majority of taxes in America.
Imagine that everyone paying taxes was put into five levels based on earnings. Those on the bottom level (earning the least) will see their income rise by 0.4%. The next level will get a 1.2 percent raise. The middle level gets 1.6, and the next-to-highest income earners would benefit from a 1.9% increase. Those earning the most will get the biggest increase of all – 2.9%.
So in the end, everyone gets a bit – but the more you earn, the more you’ll save in taxes.
Figuring out whether or not the new tax plan will save you money very much depends on how much you’re making, whether you have kids, and where you live. The more you earn, the more you will benefit from the new tax rates. If you don’t have children, you won’t feel the impact of losing the personal exemptions. Because there is a new provision for state and local tax deductions, however, you will lose some of your tax savings if you live in high-tax states like California.
The new plan is linked to jobs because President Trump hopes businesses will plow some of their savings into creating more employment opportunities. Whether or not that will happen has yet to be seen, but on an individual basis, the new plan is unlikely to save you much money. In the long-run, you probably won’t notice any difference to your tax bottom-line unless you’re among the top earners in the country.