The 12 Days Of Taxmas: Days 1 Through 4

Why will they go down? Well, it starts with new tax brackets. The tax brackets, first of all, are lower, and it takes more income to get into a higher tax bracket. I'm not going to go through all the tax brackets. I'll just give one example that probably applies to a lot of our listeners.

Let's say in 2017 you're married, and your taxable income is greater than $77,000 but less than $156,000. You're in the 25% tax bracket. Next year, in 2018, that will be 22%, so it's lower for that, plus you stay in that tax bracket up until you earn $165,000. And again, I say "earn," but this is really your taxable income. So it's your gross income minus all your deductions and all that stuff.

So the tax rates are lower, plus as you earn more, it takes more to get into the next tax bracket. The biggest difference is the highest tax bracket. To be in the highest tax bracket in 2017 and married, you needed about $480,000. Starting in 2018, to move to the highest tax bracket you have to get over $600,000.

Also, one thing that's mostly eliminated in the new tax law is the marriage penalty. That basically means that as a married couple, combining your incomes you probably paid more in taxes than you did if you were separate individuals, but that's disappearing for most people with this new tax law.

So who are the type of people who are likely to pay taxes? Generally speaking, it's probably people who live in high-tax states, because they're limiting the deduction for state, local, and property taxes to a combined $10,000. The people who are most likely to pay more taxes are those who are not going to be able to deduct as much of those taxes.

But some analyses have found other situations where people will be paying more. One analysis I read about today said about 7% of middle-income taxpayers will actually be paying higher taxes, too.

The solution for anyone who wants to know where they are is just google something along the lines of "new tax law calculator." Lots of folks are coming out with calculators where you put in your information and it gives you a good idea of what your taxes will be under the new tax law.

Southwick: So while chances are your tax bill will be lower next year, it's not going to stay lower forever.

Brokamp: No. The lower tax rates for businesses are actually permanent, but the reduction in tax rates for individuals will, as they say, "sunset" after 2025. In other words, they just go back to what they were in 2017. They did this because, as most of us know, they had to keep the cost of the bill under $1.5 trillion over 10 years, and one of the tricks they did was to say some of these things sunset or go away eight years from now, with the belief that before that happens, a future Congress will make these tax cuts permanent. Who knows? Historically it's sort of a mixed record on whether such things happen, but generally speaking, you should know that the individual changes do go away after 2025.

And one other thing they changed was how they adjust tax brackets. According to prior law, tax brackets are adjusted for the Consumer Price Index or inflation, so they go up a little bit every year. The tax brackets are now going to be changed to a different measure of inflation called the changed CPI. They're not going to rise as much, so as your income increases, more and more people are going to creep into the higher tax bracket than under the former formula.

Southwick: On the fourth day of Taxmas, Bro wants you to know that fewer taxpayers will itemize.

Brokamp: Right. A lot of the deductions that people take are going to go away -- many of the miscellaneous itemized deductions like casualty losses, and tax-prep fees, and advisor fees. They're going to eliminate personal exemptions. However, they're also going to nearly double the standard deduction that anyone gets just for being a taxpaying American. They're going to double it to $12,000 for individuals and $24,000 for married couples.

Because of the higher standard deduction, fewer people will itemize. Currently about 30% of people itemize. Once this bill is enacted, the estimates are that only about 10% of people will itemize. What that means is for many people who now get value from some itemized deductions -- one of the biggest being mortgage and another one being charitable contributions -- chances are, depending on your situation, you may no longer get a tax benefit from that, because it doesn't benefit you to itemize.

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The 12 Days of Taxmas: Days 1 Through 4
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The 12 Days of Taxmas: Days 1 Through 4
The 12 Days of Taxmas: Days 1 Through 4