Here’s How the GOP Tax Plan Might Save (or Cost) You Money

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The House of Representatives passed a monumental tax bill in November, and now the Senate has passed its own version — by a 51-49 vote around 2 a.m. Friday night. The two chambers are meeting this week to hammer out their differences before teeing up the legislation for the president’s signature.

And while there are quite a few important differences that need to be worked out, a lot of the big stuff is settled: The primary goal of both bills was to lower the corporate tax rate, from 35% down to 20%. But there are lots of other tax cuts to go around.

“Hooray, less taxes!” you might be thinking. Well, probably… but not necessarily. Both bills pair their tax cuts with other rule changes that could impact people in different ways, and a study by the nonpartisan Joint Committee on Taxation found that about a third (32%) of Americans won’t see a significant tax cut (greater than $100) in 2019, or could actually end up paying more. In fact, for a piece of legislation that cuts taxes dramatically, it’s not very popular, with critics ranging from AARP to the National Association of Realtors.

And while the corporate tax cuts are meant to be permanent, the individual tax cuts will expire in 10 years, by which time the JCT expects the bill to result in higher taxes for a lot of folks and to add about $1 trillion to the nation’s debt, even after factoring in an uptick in economic growth.

Leaving all that aside, though, here are some ways the GOP tax legislation could impact your finances in the near term:

Most people will pay less in taxes.

That same JCT analysis found that 68% of Americans would receive a tax cut of at least $100; a separate study by the nonpartisan Tax Policy Center found that households earning between $50,000 and $87,000 a year would save an average of $800 a year, at least at first. High earners are positioned to save even more — lots more. Households earning $750,000 a year or more can expect an average cut of $28,000.

Parents get a boost.

Both the House and Senate bills increase the Child Tax Credit from its current $1,000 per kid, up to $1,600 (House) or $2,000 (Senate). This benefit starts to phase out at higher incomes and, notably, expires after 2025. But for low- and middle-income families, it’s a pretty big score in the near term.

There is a trade-off, though: The Senate bill does away with the personal exemption, which currently allows you to deduct $4,050 for yourself and each of your dependents without itemizing (a big benefit to single parents and large families, among others). The expanded Child Tax Credit aims to make up for it, along with an increased standard deduction (which we’ll get to next).

Homeowners lose some advantages, especially in costly or high-tax areas. 

Only about one in five Americans itemizes their taxes (as opposed to taking the standard deduction), and they’re almost all homeowners. That’s because you can write off a bunch of related expenses, like mortgage interest and local property taxes, making it worth the headache.

That may no longer be the case for a lot of homeowners. The House tax bill would cap the mortgage interest deduction to loans under $500,000 and eliminate property tax deductions, while the Senate version would leave the mortgage interest deduction as-is (capped at $1 million) and limit property tax write-offs to $10,000. Both bills do away with deductions for state or local income and sales taxes, and the ability to deduct home equity loan interest.

At the same time, the standard deduction — which everyone can claim without itemizing – will nearly double, to $12,000 (or $24,000 for married couples). This will likely discourage a lot of people from itemizing — simplifying the tax process and helping renters, but weakening what was formerly an advantage for homeowners.

Meanwhile, residents in costly coastal areas with high sales or income taxes – like California and New York – may see an overall tax hike, as they won’t be able to write off those local levies. Some critics say this could place put added stress on local government services like police and school departments.

Home prices may fall.

Elizabeth Mendenhall, president of the National Association of Realtors, expects the loss of those homeowner tax breaks to dent home prices. “The tax incentives to own a home are baked into the overall value of homes in every state and territory across the country,” Mendenhall said. “When those incentives are nullified in the way this bill provides, our estimates show that home values stand to fall by an average of more than 10 percent, and even greater in high-cost areas.”

That’s great news for first-time buyers priced out of the market, but it comes with a caveat: Most economists say the biggest obstacle to housing affordability right now is lack of inventory – there just aren’t enough homes for sale to meet demand. If owners can’t fetch as much money for their houses, they may be more reluctant to sell, compounding that problem. Plus…

You may want to wait longer to sell your home.

One rather vexing change pertains to the capital gains tax on home sales. Currently, if you sell your home for more than you paid for it, you must pay capital gains tax on the profit – unless it’s your primary residence and you’ve lived there for two of the past five years, in which case the first $250,000 (or $500,000 for married couples) isn’t taxable. (This is one reason flipping houses is a dicey proposition.)

However, the Senate bill requires sellers to live in a home for five of the previous eight years if they want to dodge that capital gains hit.

So if someone bought a home three years ago and it’s gone up considerably in value, they may be forced to wait another two years to move or pay tens of thousands of dollars in taxes on the sale. That could further reduce housing inventory in the short term.

Grad students and indebted college graduates might lose out.

The House bill would eliminate the student loan interest deduction and force grad students to pay taxes on tuition waivers. (That means a doctoral candidate who gets $50,000 in free tuition in exchange for teaching some classes would owe taxes on that free tuition as if it were income.) The Senate version does neither, so it remains to be seen what kind of compromise is reached in a final bill.

You may be able to drop your health insurance without penalty – which would drive up healthcare premiums.

Because the Senate bill includes a repeal of the Affordable Care Act’s individual mandate — which fines people if they don’t carry health coverage — young, healthy types with a teenage invincibility complex would be able to drop their health plans to save money and not face what is currently a $695 penalty. The Congressional Budget Office expects that would drive up premiums for everyone else by 10% — leading even more people to simply ditch their high-cost insurance with hopes they don’t get a serious illness or hit by a car.

The House bill has no such provision, though, so we’ll have to wait and see how the two chambers of Congress hash out this and other discrepancies.

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