The Republican tax overhaul is a done deal. Here’s your action plan.
The massive Republican tax overhaul was rushed and it’s unpopular, but with its final approval today by Congress and President Trump’s signature expected within days, it will be the law of the land. No matter how tone-deaf and dishonest the sales pitch was, it’s time to make sense of the new reality—and what it means for you. That’s why I put together this five-point action plan. Here’s what you need to do:
1. Get help
As the legislation evolved, several news organizations developed calculators to give you a sense of where you’ll stand under the new rules—both in 2018, and several years into the future when the bill’s individual tax cuts expire. Tools from CNN, NPR, The Washington Post, and The New York Times are each worth checking out.
If you already work with a tax professional, make a phone call to go over your personal situation. It could offer some much-needed perspective and perhaps allay some of your fears.
2. Take advantage of what hasn’t changed
The new law might seem like it will affect every aspect of your financial life. But it doesn’t. There are several parts of your pocketbook it didn’t touch. Here are three early proposals that didn’t make it into the final legislation, leaving opportunities you should be sure to take advantage of:
- Congress kept its hands off tax-favored retirement saving options. That means you can still take advantage of supersmart plans like 401(k)s and IRAs to get your money growing for the future.
- The student loan interest deduction—which you can take without itemizing—is still intact. That means you can pay no tax on up to $2,500 you paid in interest on federal and private student loans if your income is $80,000 or less.
- Better late than never: During the process of reconciling the separate bills passed by the House and Senate, lawmakers abandoned at last a plan to tax tuition waivers for grad students—a common form of compensation for this cash-strapped population that will remain tax-sheltered. So 145,000 grad students, many of whom teach undergrads, can rest easier.
In addition, the mortgage interest deduction remains, though in a reduced form. Starting in 2018, homeowners can take deductions on up to $750,000 of their mortgage, down from the present cap of $1 million. Old home loans are grandfathered in.
3. Make some moves before 2018
Of course, the bill does affect many other areas of your personal finances. Two major changes—to the standard deduction and individual income tax brackets—mean you should take action now.
- Starting in 2018, the law nearly doubles the standard deduction, the threshold beyond which you must itemize deductions to lower your tax bill. The new numbers—$12,000 for individuals (up from $6,500 in 2018) and $24,000 for married couples (up from $13,000)—make it less likely that you’ll itemize.
- The law also reduces rates for most of the seven tax brackets, with more income levels taxed at lower rates. Most Americans will pay less income tax next year.
With these and other changes in mind, I’ve compiled a slew of relatively painless year-end money moves to consider, such postponing income or giving to charity. Some moves are more realistic than others.
Because the bill also places a cap of $10,000 on state and local tax deductions in 2018, you might consider prepaying your state income tax. Here’s what I mean: If you owe estimated tax for 2017, your fourth quarter payment isn’t due until Jan. 16, 2018. But 2018 is also the first year of the new tax law, when the $10,000 cap on state and local tax deductions will go into effect. If possible, send your state income tax payment before the new year, so that it’s eligible to deduct in Tax Year 2017, when such a cap won’t yet be in force. (There’s no benefit, however, to prepaying your 2018 taxes; lawmakers have specifically forbidden that attempt at an extra tax break.)
Consult a tax professional if you have any questions about how these or any other strategies could benefit you.
4. Beware the unseen (and unforeseen) effects
As Sen. Richard Blumenthal (Conn.) told public radio station WNYC on Wednesday, the day after he joined all 47 other Democrats in opposing the bill: “It raises expenses in other ways that may not be immediately visible.”
The bill’s repeal of Obamacare’s individual mandate, it is estimated, will increase the number of uninsured Americans by 13 million during the next decade, and as a result might raise your insurance premiums. And the disgraceful failure to reauthorize funding for the Children’s Health Insurance Program (CHIP), which provides routine checkups, immunizations and other health care to nearly 9 million kids, will hurt low-income families whose parents aren’t eligible for Medicaid but can’t pay for private insurance for their kids.
Other problems will take time to materialize. Republicans designed the bill’s individual tax cuts to expire in 2025, meaning that 53% of Americans will see a tax increase in 2027, as Vox reports.
And there are fears that this fiscally irresponsible legislation—which adds $1.5 trillion to the national deficit—will become a pretext for Republicans to cut key entitlements like Medicaid, Medicare, and Social Security.
5. Accept that change is a constant
The breakneck speed of the bill’s passage, which at one point included provisions handwritten in the margins, means that it’s a flawed piece of legislation that will need fixes. As Politico reported on Wednesday:
House Ways and Means Chairman Kevin Brady (R-Texas) has also acknowledged that lawmakers will almost certainly need to pass corrections to the tax bill, H.R. 1 (115), which took less than seven weeks from the first bill’s introduction to final passage. Brady said Monday that he started meeting with Treasury Secretary Steven Mnuchin last week to start figuring out how the administration can flesh out the tax bill wherever necessary. …
In the long run, the GOP also will have to grapple with the temporary provisions they decided to write into their own bill, which ends tax relief for individuals after eight years.
Future elections—especially the midterms in 2018—and the elected officials they produce, will probably prompt changes, especially to unpopular provisions like the reduced state tax break that disproportionately hits residents of blue states. (Coincidence?) The bottom line here: Stay tuned.