I've spent quite some time looking at how the GOP tax proposals will impact income tax rates. If you want to know how to determine the impact on your taxes I've developed an online calculator for you to use below. The major impacts of the proposals on taxpayers are:
- Simpler tax brackets in the House Proposal. Seven tax brackets are collapsed into four tax brackets. The Senate bill keeps all seven brackets, but changes where they kick in.
- Standard deduction has been doubled. This will reduce the number of people who itemize. Currently about 30% of filers itemize. The Tax Policy Center estimates that this will drop to 5% of filers.
- State income tax deduction has been eliminated. property tax deduction has either been eliminated (House proposal), or capped at $10,000. This impacts those who typically itemize.
- Child tax credit has been increased to $1,600 (House proposal) or $2,000 (Senate proposal) from the existing $1,000 per child.
- Personal deduction has been eliminated.
- Medical deductions is eliminated in the House proposal.
- The Alternative Minimum Tax that is paid by some moderately high and high taxpayers has been eliminated.
While this chart shows large increases in the tax rate for middle class and upper income, the elimination of the AMT may offset some of that. The chart assumes a linear growth in property taxes and mortgage interest with income, which doesn't reflect reality. If we look at a married couple with two children earning the median NJ household income ($72,062), average property taxes ($8,549), average state income taxes ($949), mortgage interest of $7,000, no medical deductions (the would need to be over $7,206 to qualify), and charitable deductions of $800 we find that they would pay 0.4% less in the House plan and 0.8% less in the Senate plan.
Other changes include reduction of corporate income taxes and increases in the estate tax exemption. A $200 tax credit has been added for non-child dependents (elder care). The mortgage interest deduction will be limited for for new mortgages. The Senate version disallows the ability to deduct interest on home equity loans (I'm not sure if this is just for new loans).
Simplification of the tax process is something that is desperately needed. While this proposal does simplify things somewhat, it does not meet the goal of a tax return that can be completed on a post card. Many filers will see an increase in their taxes. Hardest hit will be single tax payers who have high property taxes and a large mortgage.
Want to see how the proposal will affect you? Use our tax comparison calculator below.