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Key Questions About The Tax Bill – Does It Work For You?

Following a contentious, fast-track process, the House of Representatives passed the $1.5 trillion Tax Cuts and Jobs Act on Tuesday, legislation that would have a major impact on the finances of millions of Americans. The Senate is expected to vote and approve the bill Tuesday evening, after modifying a few provisions that were discovered to violate Senate rules. The House will then vote on the bill again  Wednesday morning, to deliver a bill President Donald Trump can sign into law before Christmas. The legislation, which would overhaul the tax code for the first time in more than 30 years, cuts the corporate tax rate to 21 percent from a top rate of 35 percent. It also makes tweaks to the tax brackets and many itemized deductions, while increasing the standard deductions. At the last minute, lawmakers chose not eliminate some popular tax breaks that were previously on the block, including those used by teachers, college students, and patients with high medical bills. The end result is that many Americans are likely to pay less in taxes in 2018 than they did before, while many will see no change. Still, some groups—residents of high-tax states and families with one or more children, among others—could be saddled with significantly higher tax bills. And in the long run, most Americans would end up paying more after the individual tax breaks expire eight years from now.  Republicans say the sweeping cuts will juice the economy and bring more jobs and higher wages. Democrats say the cuts unfairly benefit the ultrawealthy and over time will squeeze the middle and lower classes. The new corporate tax rate and other corporate tax breaks are permanent. But that’s not the case for individuals, who will generally see more modest changes scheduled to expire after 2025. To help you sort through the changes, here are answers to five key questions about the tax bill:

1. Will My Tax Rate Go Up or Down?

Short answer: It depends.

The tax bill keeps the number of tax brackets at seven, but some marginal rates are adjusted, with the top rate dropping to 37 percent from 39.6 percent. The changes are likely to lead to a small decrease in taxes for most Americans. But these brackets will be adjusted to a less generous inflation measure starting in 2019, so over time many people will end up being pushed into higher brackets.

The bill also nearly doubles the standard deduction to $12,000 for individuals and $24,000 for married couples, which means fewer households will itemize. That change will be costly for many residents of blue states—those with high state and local taxes, such as California, New Jersey, and New York—who can no longer write off those payments. In a last-minute concession to blue-state lawmakers, the new tax rules allow for a deduction up to $10,000 for any combination of state, local, and property taxes.

The personal exemption (currently $4,050 for individuals or $8,100 for married couples) is eliminated, which reduces the benefit of the higher standard deduction for most families, who could previously claim an exemption per family member.  Offsetting that, however, is an expanded child tax credit that will make up for the loss of that write-off for many families.

2. Will I Still Be Able to Deduct My Mortgage Interest Payments?

Yes, but you may not be able to write off as much as you did before. The new rules permit deductions for interest paid on mortgage debt principle up to $750,000. That applies to new mortgages taken out after Dec. 15, 2017. For homes purchased prior to that date, you are grandfathered and can still deduct interest on mortgages up to $1 million.

If you took out a home equity loan, or are planning to do so, interest on that debt will no longer be deductible starting next year. That rule change applies to everyone, with no grandfathering.

3. What Does It Mean for My Healthcare Costs?

The law effectively repeals the Affordable Care Act individual mandate, which requires most people to buy insurance or pay a fine, but the effect on the cost of your health insurance will depend on how you get insurance and where you live.

You won’t feel any impact if you get your health insurance through your employer, as about half of Americans do. Medicaid recipients should also see no immediate change. But if you buy your own health insurance and don’t qualify for federal government subsidies, comprehensive health insurance is likely to cost you more starting in 2019.

The expectation among many healthcare experts is that millions of people, particularly those who are younger and healthier, will drop health insurance either because they no longer have to pay the penalty or because they can’t afford the premiums. The people who remain in the marketplace are likely to be sicker and costlier to cover.

Insurers are expected to boost rates in response—or drop out of the marketplaces altogether. It’s not clear how much premiums could rise. How much of an impact the elimination of the individual mandate will have in part depends on where you live. Some states have robust exchanges with multiple insurers, which has helped tamp down premiums that have risen sharply the past few years. More sparsely populated and rural areas, which already struggle to attract insurers, would be left with fewer or no options to buy health insurance through an ACA exchange.

There is some relief, albeit temporary, if you have big medical bills. A tax break that allows you to deduct healthcare expenses is now more generous. For 2018 and 2019 you’ll be able to deduct your medical expenses when they exceed 7.5 percent of your income, instead of the current 10 percent.

4. Will It Be Harder to Pay for College?

For now, very little will change for tax breaks related to higher education.

529 plans are a popular way to save for college because the money isn’t taxed as long as it is used for qualified education expenses. The legislation would allow 529 savings to be used for private elementary and secondary school costs, up to $10,000 in expenses per student every year. 529s also could be used to pay for some homeschooling expenses.

One tax break that will be less attractive is a change to what is known as the kiddie tax. Parents who save money for their minor children, including full-time college students younger than 24, in a Uniform Gift to Minors Act (UGMA) or Uniform Transfer to Minors Act (UTMA) investment account, will now see the earnings taxed at a higher rate. The account earnings will be subject to the same 37 percent tax bracket as trusts, instead of the parents’ marginal tax rate. That will be a higher rate for all but the highest-income earners.

5. Do Retirement Savers Still Get Tax Breaks?

Despite initial talk of eliminating pretax deductions for 401(k) saving, the final bill leaves those rules intact. Still, there are two other changes to keep in mind. For employees who have taken out 401(k) loans, you will have more flexibility. Previously, if you left your job while still owing on the loan, that money had to be repaid immediately or you would owe taxes plus a penalty. But under the new rules, you will have up to 60 days to repay the loan, either directly to the plan or into a rollover IRA, without facing a tax bill.

Another change affects those who do a Roth conversion, which involves switching money from a traditional, or pretax, IRA into a Roth IRA that allows your after-tax savings to grow tax-free. This strategy requires that you pay taxes on the amount you convert, but it gives you more tax flexibility in retirement because you will have pretax and after-tax accounts to tap. Plus it minimizes future required minimum distributions, which can lower taxes later in retirement.

The new rules eliminate a possible second step to this process, known as a Roth re-characterization—a term for switching previously converted money back from a Roth IRA to a traditional one. This move comes into play if the market drops after the conversion, which would require the saver to pay taxes on gains that had disappeared. By re-characterizing, you could avoid having to pay that tax. But starting in 2018, there are no more do-overs when you convert to a Roth.

Via Consumer Reports.

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