New tax reform laws have now taken effect, and millions of Americans fully expect to see big savings when they file their 2018 tax returns next year compared to what they've paid in previous tax years. Despite concerns that some will be disappointed, it's still likely that most taxpayers will see at least some savings as a result of the new laws.
Under some of the preliminary proposals for tax reform, there were clear pockets where groups of taxpayers would have to pay more in taxes. Yet because of the way the final legislation took shape, the end result for most people will be positive. Here are several reasons why.
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1. None of the marginal rates rose
Under some initial proposals, those who were in the 10% tax bracket in 2017 would have ended up in a new lowest 12% bracket in 2018. That would have imposed small but meaningful tax increases on those low-income taxpayers least able to afford it.
Yet when lawmakers reached compromise, they sacrificed simplicity for savings. The lowest 10% bracket stayed in place, and reductions in the higher brackets created enough tax reduction to make up for changes in the income limits at which those brackets took place.
2. Many joint filers no longer have a marriage penalty
For joint filers in particular, the restructuring of tax brackets eliminated marriage penalties for all but extremely high-income taxpayers. All of the thresholds for joint tax brackets are exactly double the single tax bracket amount except for the new 37% rate, which starts at $500,000 for singles and $600,000 for joint filers.
For instance, under the old rules, the 33% bracket kicked in at $233,350 for joint filers. That compared to $191,650 for single filers. The new tax law's 32% bracket starts at a lower amount of $157,500 for singles, but the $315,000 starting point that joint filers get is considerably higher.
3. Doubling of child tax credits often offsets loss of personal exemption
Initially, tax reform took a lot of criticism for killing off personal exemptions. The rise in the standard deduction offset that impact for most taxpayers without children, but larger families didn't see enough of a boost in standard deductions to make up for the lost exemption amounts.
As it turned out, though, the doubling of the child tax credit from $1,000 to $2,000 went a long way toward eliminating any tax increases resulting from the loss of personal exemptions. Moreover, higher income limits for the new child tax credit made it more readily available to taxpayers. Mostly those who make too much to get child tax credits will be the ones facing the prospect of higher taxable income, and they get other benefits from lower rates.
4. Increase in AMT exemptions often offsets loss of state and local income tax deduction
Another controversial category of taxpayers were those who pay large amounts of tax to state and local governments. Between income, property, and sales tax, those amounts can be huge, and they make up considerable amounts of itemized deductions for many taxpayers.
Yet what many people failed to consider during the tax reform debate was that many taxpayers already had their state and local tax deductions nullified by the provisions of the alternative minimum tax. State and local taxes aren't deductible for AMT purposes, so the higher those amounts were, the more likely you were to pay AMT. Tax reform brought the two tax schemes closer to each other in terms of their treatment of these taxes, and the increase of AMT exemptions could result in net savings even for those in high-tax states.
5. Some key provisions don't take effect until 2019 or have grandfathering provisions
Finally, there are some elements of tax reform that will likely cause higher taxes going forward for some taxpayers. Alimony payments will no longer be deductible for those who divorce after 2018, making it no longer possible for those paying alimony to take valuable tax breaks. Deductions for medical expenses will be available to the extent they exceed 7.5% of adjusted gross income in 2018, but that amount will rise to 10% in 2019.
If alimony had been declared nondeductible retroactively, then those who had already divorced could have seen their taxable incomes go up. Similarly, those with high medical expenses this year could have gotten less of a deduction. Reform's final compromise extended benefits to a larger number of people in these situations.
Look for savings
There are still a few taxpayers who will end up paying more because of tax reform. Yet most people will see savings, and in some cases, those amounts will be considerable. It's worth taking the time to look through the provisions of tax reform to see where you're likely to see potential savings.
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