On December 22, 2017, President Trump signed the Tax Cuts and Jobs Acts into law. The passing of this tax reform came with $1.5 trillion overhaul of changes that left the nation wondering how exactly this tax bill would affect them come tax season. The simplest answer is that how Trump’s tax reform plan affects you — is completely determined by your income, filing status, and deductions you take.

Cutting individual income tax rates, doubling the standard deduction, and eliminating personal exemptions, Trump’s tax reform plan was the long-awaited bill that aimed to simplify the tax system. Depending on how you file, that could either mean more money in your pocket or more money taken out. Since the Tax Cuts and Jobs Act plan was signed during late 2017, the modifications went into effect at the start of January 2018— meaning this tax season will be the first where Trump’s tax plan might affect your finances.

Tax season is already a tricky time of year when scrambling to get all of your financial documents in order for accurate filing, so a newly modified tax system may feel overwhelming when you’re not entirely sure of what to expect. We’re here to break down the many tax law changes taxpayers need to know about before that final April 15th filing deadline.

The New Tax Plan: Abridged

As one of the largest pieces of tax reform legislation in over 30 years, Trump’s Tax Cuts and Jobs Act comes with a whirlwind of changes that will affect taxpayers nationwide. From Trump’s new tax brackets to new interest deduction limits, the TCJA made a number of adjustments to individual income tax code that hopes to provide the average household with a more generous tax return. While there are a number of tax law changes to note and understand, the major key elements can be simplified to four leading points.

  • The Internal Revenue Service estimates that the time to complete an individual tax return will decrease by 4 to 7 percent. Tax Foundation estimates that by optimizing tax filing processes, compliance savings could range anywhere between $3.1 billion to $5.4 billion. This is also a promising figure backing the claim that the TCJA simplifies filing operations.
  • TCJA will modify the seven current tax brackets by lowering the top tax rate percentages, so instead of the current brackets scaling at 10%, 15%, 25%, 28%, 33%, 35% and 39.6%, the newly modified brackets will be 10%, 12%, 22%, 24%, 32%, 35% and 37%. The corresponding income thresholds to these tax rates will be slightly adjusted as well.
  • New limits applied to certain itemized deductions such as mortgage interest and state and local taxes paid aims to broaden the tax base and minimize distortions within the tax code. However, these tax deduction changes also come with a sharp increase in the standard deduction.
  • An augmented revisitation of the child tax credit has made a wider range of taxpayers eligible for qualification— effectively phasing out the previous restriction that barred families over the income threshold of $110,000 from eligibility.

Who Benefits from Trump’s Tax Bill?

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Less than a week before the final signing and passing of the Trump tax reform plan, President Trump took to Twitter to announce that his “Tax cuts will increase investment in the American economy and in U.S. workers, leading to higher growth, higher wages, and more jobs!” Naturally, such a claim is met with taxpayer desire to understand exactly how these tax law changes will affect them and their wallets in the coming years.

Since there are so many different determining variables that must be taken into account before a finalized tax bill goes to the taxpayer, it is difficult to pinpoint who exactly will benefit from the many modified new tax laws. Depending on your unique filing status, income, and dependency status, you may reap the benefits of these major changes.

Everyone: One of the most outstanding updates within Trump’s tax reform plan is the near doubled standard reduction. This means single filers, heads of household, married couples, and all other filing statuses could see a significant increase in their standard deduction rate.

  • Single filers will see a $5,500 increase
  • Head of household filers will see an $8,650 increase
  • Married filing jointly filers will see an $11,000 increase
  • Married filing separately filers will see an $8,650 increase

According to AARP, by increasing the standard deduction for filers, taxpayers will spend less time laboring through itemized deductions. Since their larger standard deduction will likely exceed their qualifying expenses, taxpayers will still reap the financial benefits offered by itemized deductions.

Parents with dependent children: The Child Tax Credit (CTC) was initially designed to give parents and guardians of dependent children under the age of 17 an income boost to supplement the various costs of raising a child. In the past tax years, taxpayers with dependent children were eligible for a $1,000 tax credit. However, Trump’s tax reform plan modifies the CTC by doubling that figure to a $2000 tax credit.

Eliminating former restrictions on income thresholds, another new update to the CTC regulations allows married couples earning over $400,000 and single-filers earning over $200,000 to become eligible. This is a huge threshold increase from previous restrictions that barred married couples earning over $110,000 and single filers earning over $75,000 from eligibility.

Retirees: Taxpayers aged 65 and older will be pleasantly surprised to see the many benefits lying within the Tax Cuts and Jobs Act intended to make their financial lives smoother. Healthcare expenses tend to become more frequent and costly with age. Fortunately, under the new tax laws, retirees will see increased deductions for medical expenses that exceed 7.5% of their adjusted gross income (AGI)

In addition to the increased standard deduction rate every taxpayer will enjoy, taxpayers aged over 65 will qualify for a bonus deduction for age— no itemized deductions necessary! Seniors will also have higher filing thresholds and may qualify for tax credits for the elderly and disabled.

Alimony recipients: Historically, tax laws surrounding alimony paid under a divorce agreement declared that the payments were tax deductible by the paying ex-spouse, and treated as taxable income by the alimony recipient. Beginning on December 31, 2018, alimony payers will lose tax deductibility on their payments and recipients will be able to process payments tax-free. This rule remains consistent with child support payment tax laws.

Self-employed workers and small businesses: There are a number of updates and changes to tax codes for self-employed workers and small business owners as per Trump’s new tax plan. The most notable changes include a 14% reduction in the top corporate rate to a 21%, a brand-new 20% deduction for incomes from “pass-through” business entities, nearly doubling the ceiling for Section 179 small business expense figures, and altogether eliminating the corporate alternative minimum tax (AMT).

The latest tax reform laws also include lowered individual tax rates for those who are self-employed or own their own small business. In essence, Trump’s tax reform plan works to keep more of your self-employed earnings tax-free.

How Will I be Affected by the New Tax Changes?

As one of the top burning queries taxpayers have been asking since the passing of the Tax Cuts and Jobs Act, the question of how the new tax law changes will affect the average person is a fair one. While Trump advertised the new tax reform to be one that works in favor of middle-class families and workers, an analysis released by the Tax Policy Center revealed that only an estimated 53.9% of taxpayers within the lowest quintile will receive any tax break relief via after-tax income. And this scarcity is not uncommon.

The 2017 TPC report states that “In general, higher income households receive larger average tax cuts as a percentage of after-tax income, with the largest cuts as a share of income going to taxpayers in the 95th to 99th percentiles of the income distribution.” So while some low to middle-class households may reap the benefits of new tax terms, the highest after-income benefits will go to the highest-earning 1%. This means that taxpayers earning over $1 million will see an average tax cut of about $69,660— or about 7% of their income. So while millionaires keep above 90% of their income, the average American earning $60,000 takes home 77.25% of their income.

On a non-individual basis, corporations will be the most directly impacted under Trump’s new tax laws. The newly introduced 21% flat federal income tax rate for C corporations works in favor of big business. Instead of proportionately scaling to size or earnings, this flat fee allows giant corporations to reap larger tax-free financial benefits. On the other hand, small businesses that still qualify as C corporations may be hurt under the TCJA if the new flat fee is a higher percentage rate than past scaled rates.

In order to make all of the best individual and business decisions, be sure to head into tax season with a seasoned and informed tax professional who can provide a sense of clarity. Community Tax offers free consultation that can assist with all of your tax needs before that April 15th deadline.

Trump’s New Tax Brackets

Federal income tax is a progressive tax where the marginal tax rate on income increases as levels of income increase. These rates are divided up into seven distinguished brackets known as tax brackets. In fact, it’s these bracket rates that determine your annual tax bill. The Tax Cuts and Jobs Act keeps the same seven filing-status brackets, but upgrades five of the seven the corresponding tax rates.

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Single filers earning under $9,325 and married couples filing jointly earning less than $18,650 will keep the same 10% tax rate. Single filers earning between $416,701 and $418,400 and married couples filing jointly earning between $416,701 – $470,700 will keep the same 35% tax rate.

Keep in mind that you are subject to all of the tax brackets that apply to you. So that means if you earn $38,000, the first $9,525 is taxed at a 10% rate, then the remaining $28,475 is taxed at a 12% rate.

The taxable income level in each bracket has also been revisited and modified. With the changed tax rates come a modified layout of the income levels that correspond. These altered brackets generally benefit both high and low earners for the 2018-2025 tax plan span.

For single filers, the modified income levels are as follows:

  • 10% up to $9,525, versus 10% up to $9,325 under existing law;
  • 12% from $9,526 to $38,700, versus 15% on $9,326 to $37,950;
  • 22% on $38,701 to $82,500, versus 25% on $37,951 to $91,900;
  • 24% on $82,501 to $157,500, versus 28% on $91,901 to $191,650;
  • 32% on $157,501 to $200,000, versus 33% on $191,651 to $416,700;
  • 35% on $200,001 to $500,000, versus 35% on $416,701 to $418,400;
  • 37% above $500,000, versus 2017’s 39.6% above $418,400.

For married couples filing jointly, the modified income levels are as follows:

  • 10% up to $19,050, versus 2017’s 10% up to $18,650 under existing law
  • 12% on $19,051 to $77,400, versus 2017’s 15% on $18,651 to $75,900
  • 22% on $77,401 to $165,000, versus 2017’s 25% on $75,901 to $153,100
  • 24% on $165,001 to $315,000, versus 2017’s 28% on $153,101 to $233,350
  • 32% on $315,001 to $400,000, versus 2017’s 33% on $233,351 to $416,700
  • 35% on $400,001 to $600,000, versus 2017’s 35% on $416,701 to $470,700
  • 37% above $600,000, versus 2017’s 39.6% above $470,700

Biggest Changes in Tax Deductions

Deduction changes under the Tax Cuts and Jobs Act are among the biggest changes that will affect the average American taxpayer. In addition to doubling the overall taxpayer standard deduction, the Trump tax plan modified terms relating to itemized deductions like mortgage interest, state and local taxes, medical expenses, estate tax exemption, alimony, and many others. Let’s break down the many changes that may affect you this tax season.

Mortgage Interest Deduction: Taxpayers who become homeowners in 2018 will be able to deduct interest on up to $750,000 in mortgage debts on qualified residence loans. Former 2017 tax laws allowed interest on mortgage debts up to $500,000 to be tax deductible. The $250,000 increase will benefit a wider range of American homebuyers.

Note that as per IRS Publication 5307 home equity loans only qualify as tax deductible if they are used as funds to “to buy, build, or substantially improve your main home or second home.”

State and Local Taxes: Within the Tax Cuts and Jobs Act, limits were placed the on state and local taxes (SALT) deductions rather than total elimination as per initial Republican talks. 2018 SALT deductions are now capped at $10,000. The previous law allowed taxpayers who itemized to deduct their state and local income on their federal tax returns. This was particularly useful for residents living in high-tax states like California, New York, and Hawaii.

Medical Expenses: In past years, medical expenses were tax deductible if they totaled 10% or more of a single taxpayer’s income. The Trump tax reform laws have altered that threshold to 7.5% from the original 10%.

Estate Tax Exemption: Recipients of passed on estates could claim up to $5.49 million of the inherited estate completely tax-free before the TCJA. With the new law, the estate tax exemption has doubled over, allowing inheritors to claim up to $11.18 million completely tax-free.

Miscellaneous Itemized Deductions: New tax laws include two most notable miscellaneous itemized deduction modifications. First, only service members of the United States armed forces qualify for claiming moving expenses as tax deductible. Old laws allowed any taxpayer to claim moving expenses so long as they qualified under certain circumstances.

Second, past laws allowed victims of natural disasters to claim losses not covered by insurance as tax-deductible, however, new laws delegate that citizens must live in “presidentially designated disaster areas” in order to be eligible for the deduction. This means the president must declare a disaster in order for losses to qualify.

Removed deductions:

  • Bicycle commuting expenses
  • Job search expenses
  • Employment-related educational expenses
  • Tax preparation fees
  • Safe deposit box fees
  • Investment management fees
  • Employee business expenses

The Future of Trump’s Tax Reform Plan

President Trump’s Tax Cuts and Jobs Act is slated to be in effect from 2018 to 2025. Throughout the tax years within the TCJA period, taxpayers will likely see an increase in their tax cuts. However, by 2025 when the TCJA expires, all individual tax cuts expire too. It is estimated that by 2027, citizens earning less than $200,000 may see little change in their tax bill or may even see an increase. Tax expert Lily Batchelder predicts that in the long run, Trump’s tax reform plan “will be worth less over time than they are under current law. And people will gradually be pushed into higher tax brackets over time.”

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Between the now-frequent government shutdowns and the tides of change that could overhaul the political landscape during the upcoming election year, there is no certainty in how middle and lower-class citizens will be affected once the TCJA expires.

Navigating the waters during tax season can be difficult without proper preparation and careful understanding of everything from the newest 1040 form to the deductions you may or may not qualify for. Count on Community Tax this tax season and every upcoming tax year for expert-level consultation and money-saving filing that gets you the most out of your federal tax return!