The current administration has put together a proposal for a tax plan that would affect Americans at all levels. Apart from change and death, taxes is one of those things that is ever present. There are countries in some parts of the world that does not impose an income tax on its citizens. However, the majority of the countries in the world do have income taxes including the U.S.
Simply put, you pay taxes to the government every year. In turn, this money is used to improve the lives of its citizens. It can cover a wide range of uses from building infrastructure to subsidizing critical needs of the people. It is also used to help provide protection, education and even healthcare to the citizens as well.
You think you are saving money if you don’t pay your taxes but you are going to be in a lot of trouble. Once the IRS finds out, you are facing penalties that could make it really challenging for your budget. Tax payments are your duty as an American citizen to help improve the way of life in the country. With this in mind, how do you prepare for the tax proposal by the incumbent administration?
The tax proposal would definitely benefit some as well as hinder the finances of others. There are three things you need to understand about the proposed tax plan by the Trump administration.
Nasdaq.com shares that one of the proposed changes in the tax brackets would be with corporate taxes. At present, it stands at 35% and which is really a big chunk of a company’s gross profit. The plan is to lower that rate by as much as 20%. If approved, that would mean companies would be enjoying a low corporate tax rate of just 15%.
The belief in this approach is that as companies get to earn more, they get to invest more. As they invest, it could translate to increase in hiring and opening of more jobs in the country. This can give companies for funds for research and development as well as innovation. This can pave the way for expansion and business growth.
Income tax rate to repatriate
Businessinsider.com shares that part of the tax plan is a proposal to offer a holiday tax rate of just 10% to companies bringing business back to the U.S. This refers to multinational companies who have business interests in several parts of the globe. Again, as the companies are able to bring in funds from their offshore businesses, it can spur economic growth. This can be in the form of reinvesting the money and hiring more people creating jobs.
Income tax brackets
As a consumer, this is what should concern you the most. Regardless whether you are a single filer or married-joint filers, the new tax plan covers changes to both sides. According to cost information site Howmuch.net, this is how it would look like if the proposal is approved.
From a high of 8 brackets, it would now be streamlined into three. Your tax bracket could fall under 12%, 25%, and 33%. According to the infographic, there are brackets that would benefit from by having a lower tax rate. There are some that would still have the same rate. While for others, they would end up paying a higher rate than before.
As a consumer, how do you prepare for this tax plan? Here are a few things to consider to help you put your finances in order.
Learn as much as you can about the proposed tax plan
It is best to read up and look at the new tax bracketing system. There would not be much problem if you are either unaffected or your bracket remains the same. However, there are those that will see an increase in their tax rate. This can be a problem especially if you are already running on a tight budget as your net income is affected.
If you are in that category where your rate goes up, you need to revisit your budget. The idea is to identify areas where you can make financial adjustments. This is because your take-home pay could be smaller than what it used to be. If the new tax plan does not push through, you at least have a plan to lower down your expenses. This should free up some funds in your budget and help you with a little more breathing room.
If it affects you negatively, look for ways to augment income
Again, if you are one of those that will see an increase in your rate, you might want to explore a side hustle. Look for ways to increase your earning potential. It can be taking on skills that can help you get a promotion in the office. It can even be putting up a business on the side that you can manage at home after work.
You can even look at your hobbies and see how it can be converted into an income-generating skill. If you love photography, offer your skills to family and friends. You can cover birthdays, events, and other activities over the weekends. If you have a talent for design then look up online jobs where you can put your passion into a cash-generating experience.
Check your W4 to manage the over-payment you are making
It is exciting to receive a refund check on your taxes every year. There are countless ways to make the most out of a tax refund check. However, it might be high time that you check your W4 and see where you can make adjustments. The idea is to mitigate overpayment so you can use that amount early on. Rather than giving the government an interest-free amount for about a year, you can invest that money already.
If you are getting $3600 as a tax refund, that is about $300 a month. You can use that to pay down a credit card debt and save interest. You can put that amount in a reserve fund to help you in during a time of need. It is also possible to invest that money and start growing it with the help of compound interest. The idea is to have the chance to grow that money rather than waiting for it to be returned back to you.
Pay off debts to save money on interest
One of the things you can do as well to prepare for the new tax plan is to aggressively pay down your debt. What this does is it frees up funds in your budget once you pay off financial obligations. These freed-up funds can then be used to offset any spike in your tax payments. You can then still live within your budget.
It is possible that you have multiple obligations so it might be a good idea to look into debt consolidation loan. What it does is it helps you streamline your payments under one account.Rather than juggling multiple due date and amounts, you now have to concentrate on one date and amount. You will also have one interest rate to think about.
The new tax plan is still in its early stages and there is no guarantee that it will push through. The administration even had difficulties with the American Health Care Act deal not pushing through. Nevertheless, you still need to be prepared and look at your finances on how it will be affected by the proposal. It is better to be prepared than being caught off-guard.