Taxes are complicated — just ask the guy who wrote this article. The Tax Cuts and Jobs Act (TCJA), signed into law by President Donald Trump in December 2017, made significant changes to the tax code, which you’ll see for the first time when you file your taxes in the spring of 2019. The law cut individual and corporate tax rates, doubled the standard deduction and made many other changes both large and small. But will those changes make it easier or harder for you to fill out and file your return? Keep reading for a breakdown of the tax law changes, and how the Trump tax reform will affect you.
The Trump tax plan details:
- Tax Bracket Changes
- Deduction Changes
- Individual Mandate Changes
- Education Payment Changes
- Alternative Minimum Tax Changes
- Corporate and Business Tax Changes
- How Will Tax Reform Affect the Economy?
- How Will Tax Reform Affect You?
- Who Benefits Most From the New Tax Law?
- What’s Next for the Tax Cuts and Jobs Act?
The new law made two significant changes to individual income taxes. Although there are still seven tax brackets, the tax rates for five of the seven brackets changed. The taxable income level in each bracket also changed. The Tax Policy Center estimated that the average tax cut each household will receive is $1,200, with middle-income households saving $900.
Study the table below to see how the Trump tax brackets are different:
|Tax Cuts and Jobs Act Tax Bracket Changes|
|Tax Year 2017||Tax Year 2018|
|Tax Rate||Single Filer||Married Filing Jointly||Tax Rate||Single Filer||Married Filing Jointly|
|10%||$0 – $9,325||$0 – $18,650||10%||$0 – $9,525||$0 – $19,050|
|15%||$9,326 – $37,950||$18,651 – $75,900||12%||$9,526 – $38,700||$19,051 – $77,400|
|25%||$37,951 – $91,900||$75,901 – $153,100||22%||$38,701 – $82,500||$77,401 – $165,000|
|28%||$91,901 – $191,650||$153,101 – $233,350||24%||$82,501 – $157,500||$165,001 – $315,000|
|33%||$191,651 – $416,700||$233,351 – $416,700||32%||$157,501 – $200,000||$315,001 – $400,000|
|35%||$416,701 – $418,400||$416,701 – $470,700||35%||$200,001 – $500,000||$400,001 – $600,000|
|39.6%||$418,401 or more||$470,701 or more||37%||$500,001 or more||$600,001 or more|
The modified tax brackets benefit both high and low earners. Tax rates have been reduced, and the income ranges that dictate which bracket you fall under have increased.
Remember that your income doesn’t sequester you into one tax bracket — you’re affected by all the ones that apply to you. For example, falling under the 12 percent tax bracket doesn’t mean that all your income is taxed at 12 percent. If you make $38,000 per year, the first $9,525 is taxed at 10 percent, and the rest is taxed at 12 percent.
Deductions reduce the amount of income that’s subject to taxation, and they changed significantly under the TCJA. These are some of the biggest changes that will likely affect you:
- The standard deduction was doubled
- All personal exemptions were eliminated
- Mortgage interest deductions and state and local tax deductions were capped
See which deductions have changed under the new law, including some credits and exemptions:
|Tax Cut and Jobs Act Deduction Changes|
|Deduction||Tax Year 2017||Tax Year 2018|
|Personal Exemption||Tax filers could claim personal exemptions for themselves, their spouse and their eligible dependents at $4,050 per exemption||Eliminated in lieu of a higher standard deduction|
|Mortgage Interest Deduction||
|State and Local Taxes||Itemized deductions could include all state and local taxes||These deductions are now capped at $10,000|
|Medical Expenses||Medical expenses were deductible if they totaled 10 percent or more of a taxpayer’s adjusted gross income||That threshold has been reduced to 7.5 percent|
|Estate Tax Exemption||Deceased parties could pass on up to $5.49 million of their estate tax-free||The exemption has more than doubled to $11.18 million|
|Child Tax Credit||Each qualifying child could get you a credit of $1,000||The credit has increased to $2,000, and up to $1,400 of the credit is refundable for each qualifying child under the Additional Child Tax Credit|
|Alimony||The person making alimony payments could deduct them from their taxes, and the person receiving them had to report the payments as taxable income||The person making alimony payments can’t deduct them, and the person receiving them doesn’t need to report the income|
According to the Tax Foundation, 28.5 million taxpayers will be better off with the expanded standard deduction.
In addition to these changes, the TCJA also introduced a new $500 credit for qualifying non-child dependents. This family credit can include relatives who are above child age but require regular care.
The TCJA dispensed with the Affordable Care Act’s individual mandate, which required taxpayers to have health insurance or pay the equivalent of a fine. The shared responsibility provision will not be applied to the 2019 plan year — which you’ll pay taxes for in 2020 — according to healthcare.gov. For plans through 2018, however, you will owe taxes if you, your spouse or your tax dependents don’t have qualifying health coverage. The fee is calculated as follows:
- Per person: $695 per adult and $347.50 per child under 18, adjusted for inflation
- Income percentage: 2.5 percent of yearly household income
You will pay whichever fee is higher. The maximum amount is either 2.5 percent of your yearly income or the total yearly premium at the national average price of a market bronze plan.
The law made changes to how people can save for education expenses — the 529 college savings account — and how student loans are treated. Previously, 529 funds could only be spent on secondary education. Now, qualifying expenses include schooling starting in kindergarten. This will primarily benefit people who pay for their children to attend private school before college.
Before the TCJA, student loan debt that was discharged due to death or disability was taxed as income. Under the new law, this is no longer the case.
The alternative minimum tax typically applies to higher-income households — it imposes an additional tax if the taxpayers have used exemptions or special circumstances to significantly decrease their standard income tax payment. The TCJA increased the exemption amounts for the alternative minimum tax: $109,400 for married couples filing jointly and $70,300 for single filers.
The earnings level where the exemptions phase out is also much higher now: $500,000 for single filers and $1 million for joint filers. You might still owe alternative minimum tax under the new law, but chances are you’ll be paying less.
Under the Trump tax cuts, the maximum federal corporate income tax rate dropped from 35 percent to a flat 21 percent rate across the board. Previously, corporations were divvied up into brackets and paid a rate depending on their income.
Some of the other effects of the TCJA for corporations and businesses include:
- A new provision that establishes a 20 percent deduction for certain pass-through businesses
- An increase in the expensing cap from $500,000 to $1 million for depreciable assets
- An end to the corporate alternative minimum tax
The TCJA has been polarizing in the interpretations of its effects on the economy, but the law will certainly increase the deficit by billions.
The Brookings Institution, in a preliminary analysis of how the TCJA will impact the economy at large, found that although the law provides a short-term stimulus, its long-term effect on America’s gross domestic product will be small. Furthermore, the Congressional Budget Office estimated that the TCJA will have no impact on American incomes after a decade.
The Economic Policy Institute called the TCJA a “deeply flawed policy.” It noted that the only permanent tax cut in the law is the flat 21 percent corporate tax rate. The majority of the other changes, such as the decrease in the top marginal tax rate for individuals, are scheduled to expire in 2025. The Economic Policy Institute also cited predictions from the Tax Policy Center that the top 1 percent of households will see the bulk of the benefits by 2027.
On the other hand, the Tax Foundation identified high corporate income taxes as the most harmful factor affecting economic growth. Lowering the corporate tax rate should, therefore, have a positive effect on economic growth.
Changing tax brackets will affect how much you owe and the size of your refund. The biggest change for most individual filers will likely be the increased standard deduction. Since the amount has doubled, it also decreases the need to itemize deductions. The Tax Foundation estimated that around 90 percent of taxpayers will take the standard deduction instead of itemizing. The IRS estimated that the amount of time needed to complete your taxes will fall by 4 to 7 percent.
However, the removal of itemized deductions has the potential to hurt taxpayers. A February 2018 CNBC article gave a few examples of workers paying out of pocket for business expenses: “Nurses can’t write off their scrubs anymore. Salespeople can’t deduct their travel expenses. Professors can’t subtract research costs.”
Although the standard deduction has doubled, the personal exemption is gone. Taxpayers with large families and multiple dependents might see their tax bill increase as a result.
If you live in a state with high home prices as well as high state and local taxes — places like California, New York and New Jersey — you’ll also feel the pinch of the new law due to the lower cap for the mortgage interest deduction and the new cap on deducting state and local taxes. You might actually need to adjust your withholding and amend your W-4 so you don’t get hit with a tax bill that you can’t pay.
Corporations, especially large ones, benefit the most. No party covered under the TCJA experienced a more drastic tax rate reduction. Since the new rate is flat and irrespective of income, the bigger the business, the more it benefits. Smaller businesses might actually be hurt by the new rate because it could be higher than what they were paying before. Another benefit for businesses: The corporate tax cut is permanent.
The wealthy will also benefit from the new tax law. According to the Tax Policy Center, those earning more than $1 million will be the largest beneficiaries by far, seeing an average tax cut of $69,660.
The tax bracket changes coupled with the standard deduction increase will no doubt have a positive effect on some households, but the changes are temporary — most individual changes expire in 2025. The removal of personal exemptions and various itemized deductions will likely counteract that modest positive benefit or even hurt household taxes. Although it might be too dramatic to say that the average taxpayer lost out under the new law, their gains are certainly less noticeable in the long, or even short term.
In September 2018, Republicans in the House Committee on Ways and Means moved through a series of bills they were calling Tax Reform 2.0. The bills would have made the reduced individual tax rates permanent and created new incentives to save, such as eliminating IRA contribution limits. However, those bills didn’t make it to the House of Representatives for a vote before Democrats took the House in the midterm elections — and Democrats have their own ideas about tax reform.
More on Taxes
- Tax Deductions Are Changing Drastically But You Can Still Optimize Your Return
- These Are the 13 Tax Law Changes Families Need to Know About
- Republican Tax Cuts Have Put $1 Trillion Back in Shareholders’ Wallets