Tax Reform Impact on Average American
Updated: Apr 24, 2018
President Trump’s new tax reform is the most significant overhaul of the US tax code. As far as the effect of this tax reform on the average single young professional, the amount of money they would pay in taxes will probably be the same, but could be more due to the various deductions that were eliminated.
One of the eliminations were the personal exemptions. Before the Act, taxpayers subtracted $4,050 from income for each person claimed. As a result, some families with many children will pay higher taxes despite the Act's increased standard deductions. Standard deductions on the other hand are doubled. A single filer's deduction increased from $6,350 to $12,000. The deduction for Married and Joint Filers increased from $12,700 to $24,000.
It is estimated that 94% of taxpayers will take the standard deduction. The higher standard deduction is estimated to result in more taxpayers taking the standard deduction, and fewer would take advantage of the mortgage interest deduction.
The National Association of Home Builders and the National Association of Realtors opposed this, as that could lead to a lower housing prices. And since many Americans are concerned that the real estate market is in a bubble that could lead to another market collapse, the Act might be beneficial in working against that theory. The Act also limits the deduction on mortgage interest to the first $750,000 of the loan. Interest on home equity lines of credit can no longer be deducted. Current mortgage-holders aren't affected.
The Tax Act also eliminates most itemized deductions. That includes moving expenses, with the exception of members of the military. Those paying alimony can no longer deduct it, while those receiving it can. It keeps deductions for charitable contributions, retirement savings, and student loan interest.
In regards to the Child Tax Credit, currently, qualifying families get a $1,000 credit per child under the age of 17, and the average American earning $56,516, whether single or married, is eligible for the credit in full. Under the new tax plan, the credit will increase to $1,600, which means households with at least one child will benefit. Unlike a tax deduction, a tax credit is a dollar-for-dollar reduction of your tax liability, so that extra $600 would make a difference. This means saving under the new tax plan as opposed to paying more. The new tax bill also includes a $300 credit for non-child dependents for five years, after which that provision would go away.
The average American household having 3.27 individuals, so if we round down to three, two parents and a child, that family will actually lose under the new tax plan when you look at total deductions and exemptions. That's because under the current system, that household would be eligible for a $13,000 standard deduction, plus $12,450 in exemptions for a total of $25,450. With the exemption gone under the new tax plan that family would be left with just a $24,000 standard deduction to claim. So in this case, that family will actually lose money under the new tax plan.
In summary, the Tax Act keeps the seven income tax brackets but lowers tax rates. Employees will see changes reflected in their withholding in February 2018 paychecks. These rates revert to the 2017 rates in 2026.