Will the Tax Bills Cost or Save You Money?
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The Tax Cuts and Jobs Act (PDF) passed by the Senate last week, as with the House bill of the same name, could create major changes in Americans’ lives that many are just beginning to fathom.
Congress still has to combine the bills into a single piece of legislation. But based on the bills’ similarities, it’s likely that the final resulting law will have huge implications for most Americans, from where they choose to live, to how they pay for their own or their children’s education, to how—or whether—they’ll get health insurance.
The main focus of both bills is a huge cut in corporate taxes, from the current top rate of 35 percent to a flat 20 percent. For individuals, the two pieces of legislation offer more modest and less permanent breaks. Both nearly double the standard deduction, change tax brackets, and add or increase some credits.
To help pay for those changes, both bills end most deductions for state and local taxes but allow property-tax deductions of up to $10,000. The bills also introduce a more stingy inflation factor used in many tax calculations.
The House bill cuts many deductions used by particular groups—teachers, college students, divorced people, and patients with high medical bills, for instance—and reduces how much mortgage interest taxpayers can deduct. The Senate bill preserves most breaks but gets rid of the Affordable Care Act’s penalty for being uninsured.
In the House bill, a new, $300-per-person, “family” tax credit disappears in 2023. The Senate bill sunsets almost all of its changes affecting individuals in 2026. By contrast, the corporate tax breaks are permanent.
Researchers have looked at the potential impact. For instance, one study found that an estimated 13 million people could go without health insurance as a result and that countless others insured by state insurance marketplaces could see premiums rise further.
Another study determined that middle-income families who currently take the standard deduction most likely would get a tax cut in 2018. Itemizers, on the other hand, stand a 50-50 chance of paying more. After a few years, though, individuals would gradually pay more.
Yet a third study has estimated that the Senate bill would save money for all groups of taxpayers in the first few years; after 2027, when most of its breaks sunset, only those in the top 1 percent of income would still see significant gains. The lowest 20 percent by income would actually owe more.
However, these studies focus on averages and aggregates, which obscures the reality that each family’s or individual’s tax situation is different. How would the varying tax brackets, the loss of specific breaks, and the gains from a higher standard deduction and child tax credits affect individual households? Under which bill would one family fare better?
To find out, we decided to look at the bills’ impact on several specific but representative households. We asked Phillip Schwindt, principal tax research analyst at Wolters Kluwer Tax and Accounting, a tax software and information company based in Riverwoods, Ill., to help us crunch the numbers for a few hypothetical families.
Maybe you’ll find a scenario here that resembles your own. That may help you get a better understanding of how you and your family could fare in the future under either plan.
How the Tax Proposals Could Affect You
Editor's Note
For those most part, these scenarios are based on average figures for income, home prices and other factors, provided by the Internal Revenue Service, the Bureau of Labor Statistics, and other sources. In these examples we assume that each household has private health insurance, except for the retired couple, which is insured by Medicare.
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