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Tax reform is finalized: A simple explanation on how the GOP tax bill might affect you

UPDATED: Wed., Dec. 20, 2017, 3:50 p.m.

Members of the tax-writing House Ways and Means Committee, from left, Rep. Peter Roskam, R-Ill., Rep. Richard Neal, D-Mass., the ranking member, and Chairman Kevin Brady, R-Texas, go before the House Rules Committee as Republicans in the House and Senate move to pass the sweeping $1.5 trillion GOP tax bill on party-line votes, at the Capitol in Washington, Monday, Dec. 18, 2017. (J. Scott Applewhite / AP)
Members of the tax-writing House Ways and Means Committee, from left, Rep. Peter Roskam, R-Ill., Rep. Richard Neal, D-Mass., the ranking member, and Chairman Kevin Brady, R-Texas, go before the House Rules Committee as Republicans in the House and Senate move to pass the sweeping $1.5 trillion GOP tax bill on party-line votes, at the Capitol in Washington, Monday, Dec. 18, 2017. (J. Scott Applewhite / AP)

Congress approved a final tax Wednesday – the Tax Cuts and Jobs Act – that will significantly cut corporate taxes, while temporarily giving most Americans lower taxes until 2026.

Wealthy Americans will see some of the deepest cuts, thanks to a reduction in their top tax rate and an increase in the income required to pay that amount.

The package is estimated to cost $1.46 trillion over the next decade, according to a nonpartisan analysis from the Congressional Budget Office.

Here’s a look at what’s in the new law.

Individual tax rates

The bill keeps seven tax brackets, as under current law, with slight cuts to the tax rates for most. These cuts will expire in 2026, so savings for most families will be temporary.

People in the bottom bracket still will pay 10 percent of their taxable income, though the actual amount paid will fall for most due to an increase in the standard deduction. Other brackets will see rates from 1 to 4 percent lower.

The top tax rate for the wealthiest Americans will fall from 39.6 percent to 37 percent, and the income threshold will increase to $500,000 for a single person or $600,000 for a married couple. That’s a bigger cut than was in either the initial Senate or House bill.

Standard deduction and personal exemptions

The bill nearly doubles the standard deduction until 2025, at which point it will revert to present-day levels, adjusted for inflation.

The new deduction will be $12,000 for singles, $18,000 for heads of household and $24,000 for married couples.

The bill also suspends personal exemptions, which allow people to take $4,000 per person in the household off their taxable income, with some exceptions. Those exemptions will end in 2018 and return in 2025, when the increased standard deductions expire.

Corporate taxes

The bill will immediately cut the current tax rate on corporations from 35 percent to 21 percent. Unlike tax cuts for individuals, the corporate rate cut would be permanent.

Employees, contractors and small businesses

Business employees can no longer claim a number of miscellaneous deductions for unreimbursed expenses, including a home office, union dues, licensing fees, professional organization memberships and work-related education.

For people who aren’t traditional employees of a business, the bill may change a little or a lot, depending on how they classify themselves and their income.

The bill allows a significant deduction for “pass through” income, where the income made by the business is passed through to the owner’s individual tax return. Currently, pass-through income is taxed at the same rate as other income.

The bill will give business owners a 20 percent deduction on their pass-through business income, allowing them to keep more earnings tax-free. Service businesses, including law firms, medical offices, investment offices and accountants, only will be able to take that deduction if they make less than $315,000 for married couples. This change expires in 2025.

Self-employment taxes for freelancers, Uber drivers, independent salespeople and other contractors aren’t changing. The biggest changes for people who do business as sole proprietors will be the changes to individual tax rates.

Education

Graduate students across America can breathe a sigh of relief: The bill won’t count tuition waivers as taxable income, something many universities warned would destroy Ph.D. programs and research.

The student loan deduction will stay as it is under current law.

Parents will have the option to set aside money in tax-free accounts to pay for primary and secondary school, not just college. That would help parents sending their kids to private schools or homeschooling.

Child and family tax credits

The bill raises the child tax credit and makes more of it refundable, meaning low-income families who owe no taxes will get a bigger check back from Uncle Sam.

The final bill has a $2,000 credit per child, up from the current $1,000. Up to $1,400 of that is refundable.

Health insurance and medical care deductions

The bill scraps the Affordable Care Act penalty for individuals who don’t buy health insurance starting in 2019.

The CBO estimated that change would increase insurance premiums and leave 13 million more Americans uninsured by 2025. The change will be a mix of people electing not to buy coverage they feel they don’t need and people losing coverage because of further premium increases.

The bill makes an existing deduction for medical expenses more generous in 2017 and 2018, allowing people to claim a deduction when unreimbursed medical expenses are more than 7.5 percent of gross income. After 2018, the deduction will revert to the current 10 percent cutoff.

State and local tax deduction

The bill will allow a deduction of up to $10,000 for state and local taxes for both singles and married couples.

Mortgage interest deduction

Currently, homeowners can deduct mortgage interest from the first $1 million of home debt. The new law lowers that to $750,000.

Estate taxes

Under the final bill, you’d be able to pass $11 million to your heirs tax-free, or $22 million if you’re a married couple. The House bill had scrapped the tax entirely, but the compromise ended up keeping it in place while doubling the exemption.

This story was updated after the final bill was pass by Congress on Wednesday, Dec. 20, 2017.

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