By Julia Dellitt on January 24, 2018
While most American families can expect reduced taxes under the new plan, the impacts will vary widely by economic class. Priscilla Du Preez/Unsplash
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.
What Most Families Can Expect
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.”