After a tumultuous legislative year for Republicans, filled with debates about health care reform and the 2018 federal budget, the GOP has finally released its plan to overhaul America’s tax system. A central component of this new tax plan, dubbed the Tax Cuts and Jobs Act: A reduction from seven tax brackets to four, with rates of 12 percent, 25 percent, 35 percent and 39.5 percent.
The plan also makes no changes to the current annual limit you can contribute to your 401(k), which was $18,000 for 2017. There had been talk that Republican lawmakers would cap the limit at $2,400.
The House approved the budget blueprint last week, which would allow Congress to pass the bill without any Democratic votes. House Speaker Paul Ryan has said he wants his chamber to approve the measure by Thanksgiving, with the goal of having it signed into law by the end of the year.
If the plan does go into effect, here's how things could change depending on income bracket.
Individuals who earn more than $418,400 and couples who earn over $470,000 are currently taxed at a rate of 39.6 percent. The tax rate will drop to 35 percent for individuals who make up to $500,000 and for couples who make up to $1 million. Individuals who make over $500,000 or couples who earn over $1 million in income will continue to be taxed at the 39.6 percent tax rate.
Aside from a direct change in tax rates, other aspects of the tax plan will benefit the rich, including significant changes to the death tax (also known as the estate tax). Repealing it has been a priority of the GOP for years.
If someone dies with more than $5.5 million in property, whoever inherits that money has to pay a federal tax of up to 40 percent. This threshold has now been doubled to over $11.2 million, and the tax will be phased out after six years.
The alternative minimum tax has also been axed, which was created to make sure we all pay our fair share of taxes. Essentially, the government requires filers with lots of deductions to calculate their taxes once under the regular rules of the 1040 and once under the AMT rules. You end up having to pay whichever tax is higher. President Donald Trump paid a hefty amount in 2005, according to two pages from his tax return, because of the AMT. The amount: $36.5 million.
Prior to the release of this tax bill, the Tax Policy Center conducted an analysis of past Republican tax blueprints and a Trump administration outline released earlier this year to find out who would be likely to save money. It found that about 75 percent of the savings from the tax overhaul would go to the top 20 percent of earners (those who make more than $149,000), while more than half of the savings would go to the top 1 percent, or those who earn more than $732,800.
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The middle class
The definition of "middle class" is a murky one, with different income ranges floating around. But the Pew Research Center puts it at between $48,000 and $145,000 for a family of four.
Many in the middle class will fall into the newly created 25 percent tax bracket, which will apply to incomes of up to $200,000 for individuals and $260,000 for couples. These taxpayers could see a tax cut of around $700 a year, according to the Urban-Brookings Tax Policy Center.
This plan will also double the standard deduction, which was initially put into place to provide tax relief for the middle class. A single filer will be able to subtract $12,000 from their income, while couples will be able to subtract $24,000.
However, this plan will eliminate most itemized deductions, such as those for student loans or medical expenses, which have been used instead of the standard deduction by some to pay less taxes.
Another popular deduction, the state and local tax deduction, will be limited to property taxes and capped at $10,000 under the Republican tax plan. The state and local tax deduction has been popular with middle-class families in high tax states.
The low income
The new 12 percent tax rate will now apply to individuals making up to $45,000 and up to $90,000 for married couples, meaning it's been increased for individuals who made up to $9,325 and couples who made up to $18,650, who had previously been taxed at a 10 percent rate. However, it's been decreased for individuals who made between $9,325 and $37,950, and married couples who made between $18,650 and $75,900, who had previously been taxed at a 15 percent rate.
One change that may help low-income Americans: an expansion of the child care tax credit, which will now give families $1,600 for one child or dependent — up from $1,000.
However, the credit in its current form has been questioned over how much it really helps families. The Center for American Progress said families who earn less than $3,000 during the tax year don't reap its benefits, while the refundable portion phases in so slowly that low-income families only end up receiving part of it.