On Wednesday, both the House and the Senate approved the Republican tax plan, the first major overhaul of the federal tax system in 31 years.
Corporations appear to be the biggest winners. Their tax rate will be permanently lowered from 35% to 21%. Additionally, the 20% corporate alternative minimum tax was repealed. Another big change: American companies doing business overseas will not have to pay taxes here on income they earn abroad. If they bring that overseas income back to the U.S., they will pay a tax rate between 8% and 15.5% instead of the current 35%.
The corporate tax cut is expected to increase companies’ bottom-line profits, allowing them in theory to increase dividends, expand their business, buy back stock, hire more workers, and increase wages. These things are all supposed to help stimulate the economy. Whether any of this happens remains to be seen, but stock investors seem to be buying into the tax bill’s impact.
Whether the corporate tax changes will benefit only America’s wealthiest or trickle down to the rest of us, only time will tell. One positive note: AT&T announced they are going to return some of their tax savings to over 200,000 employees in the form of a $1,000 holiday bonus this year. If they do this every year, maybe we are onto something.
Many individuals, including those who take the standard deduction and don’t have dependent children, will benefit modestly from the new tax plan. The standard deduction will increase from $6,500 to $12,000 for single filers and from $13,000 to $24,000 for married couples. However, the $4,050 personal exemption goes away. If you are married with two children, the loss of $16,200 in personal exemptions means you may be worse off, even with a higher standard deduction.
If you itemize your deductions, this new tax bill may increase your taxes. The amount you can deduct for medical bills may be reduced, depending on your situation. The maximum you will be able to deduct for sales, income, and property taxes combined will only be $10,000. If you take out a big mortgage to buy a new home, you can only deduct interest on the fist $750,000 of the mortgage.
Many people across tax brackets will see their tax rate drop by about 3 percent. Click this link to see where your own income will fall in the new tax schedule.
Though the corporate tax rate reduction is permanent, the individual rate reduction, unfortunately, is not—it’s set to expire in 2025. But hopefully, the new plan will help keep a few extra dollars in our pockets next year to help pay off those holiday shopping bills.