Ben Franklin put it best in a letter he wrote in 1789 that said, “In this world nothing can be said to be certain, except death and taxes.” Taxes are a part of adult life, and the amount you pay can have not only a great impact on your paycheck, but also can determine the kind of life you can afford to live.
The GOP-controlled House and Senate have recently passed major new tax legislation, and there are a lot of questions being asked by a lot of people, usually about how it will affect their wallets. We’re going to go over a bit of the tax bills’ impact, hoping it will help to clear things up.
If you’re reading this, then it’s likely you’re a student, and students usually either don’t have full-time jobs, or if they do, they aren’t making a ton of money. We’re going to be looking at realistic numbers in this article, and the numbers are set to change year-to-year so we’re going to be sticking to the first year of the tax plan, and compare it to the tax plan currently in place.
To understand the changes’ impact on you, you need to know what deductibles are, because that’s where the biggest changes are being made. Deductibles are things that subtract from your overall taxable amount in a given year – they may be intended to encourage certain behavior (home-buying, for one) or help out personal budgets (medical expenses, etc.). For example, if you make $1,000 and have a $400 deduction, you end up paying taxes as if you had only made $600. Seems simple enough, right?
When doing your taxes, you have two options: either a standard deduction, or an itemized deduction. The standard deduction in the current tax system is $6,000 and basically means, all those things you hear people saying you can “write off” on your taxes – which requires receipts and bills and such – if you instead do a standard deduction, you don’t really mess with any of those individual deductions. You just take a standard, $6,000 deduction and call it good.
Then, we have itemized deductions (where all those people on TV and in movies doing their taxes whip out mountains of receipts). If you use these, it means that some of what you paid for throughout the year can be used to offset what you have to pay in taxes. They can be medical bills, student loans, and mortgages, among other things.
The new, proposed tax plan (per the House- and Senate-passed bills – which still must be reconciled, but individual tax rates are in agreement) removes some of the itemized deductions, and doubles the amount of the standard deduction.
Basically, no longer would you be able to take itemized deductions to offset things such as your student loans, but instead most young people would profit from using the standard deduction, which would double to $12,000.
Let’s look at “Sam,” our dashing example student, who goes to school full-time and works about 30 hours a week at a grocery store, and makes $13 per hour, so at the end of the year, has earned around $19,000 in wages.
Sam doesn’t make many purchases; he/she pays rent and bills, and has a little left over. There are student loans, but Sam doesn’t have enough other eligible purchases/expenses to make it worth itemizing, and so, come tax time, the standard deduction makes most sense.
Under the current rules, making $19,000 and after a $6,000 deduction, Sam would pay 10 percent on the first $9,525 and 15 percent on the remaining $3,475 (of the total $13,000), which would mean a federal income tax bill of about $1,473.
Under the proposed plan, if Sam earns the same amount the standard deduction has doubled, and the tax rate is lowered to 12 percent (see chart). Sam would owe 12 percent of just $7,000, which totals $840.
In this case, then, Sam will end up paying more than $600 less than under the current tax rules.
Obviously, the amount of taxes people pay varies with each individual. What might be a good thing for Sam might be a bad thing for you – especially if you now benefit from one or more itemized deductions. We’ve included the chart so you can see what the 2018 tax breakdown looks like under the proposed tax plan.
Keep in mind, until the tax plan is finalized and things are made official and made into law (keeping/elminating some popular deductions is being debated as we write this), all this is fluid, and could change at any point. Stay tuned.
For more information on taxes and how some of them work, check out this article