How Trump's Tax Reform Plan Affects You

President Donald Trump signed the Tax Cuts and Jobs Act (TCJA) on Dec. 22, 2017.1 It cut individual income tax rates, doubled the standard deduction, and eliminated personal exemptions from the tax code. The top individual tax rate dropped from 39.6% to 37%, and numerous itemized deductions were eliminated or affected as well.2

The Act also cut the corporate tax rate from 35% to 21% beginning in 2018. The corporate cuts are permanent, while the individual changes expire at the end of 2025 unless Congress acts to renew some or all of the provisions of the TCJA.

How It Affects You

The TCJA is complex and its various terms affect each family differently depending on their personal situations:

•     High-income earners: The Tax Foundation has indicated that those who earn more than 95% of the population will receive a 2.2% increase in after-tax income. Those in the 20% to 80% range would receive a 1.7% increase.3

The Tax Policy Center said those in the bottom 20% would only receive a 0.4% increase.

•     Those with valuable estates: A larger exemption for the estate tax will benefit you if you leave an estate that's worth a lot of money. The TCJA doubled the estate tax exemption from $5.49 million in 2017 to $11.18 million in 2018.4

•     Taxpayers who claim the standard deduction: You'll win on two levels if your itemized deductions are less than the standard deduction, so you claim the standard deduction. First, it will reduce your taxable income more. Second, you can skip the complicated process of itemizing. That not only saves you time, but it will also save you money if you no longer have to pay a tax advisor.

•     Large Families: You might be hurt by the elimination of personal exemptions under the terms of the TCJA. The increased tax credits for children and adult dependents and the doubled standard deductions might not be enough to offset this loss for families with multiple children.5

You can deduct only the first $10,000 under the terms of the TCJA if you live in a state with high property taxes.

•     The self-employed: You might benefit from the 20% deduction qualified business income deduction if you're an independent contractor, own your own business, or are self-employed.6

•     Young people: Since young people are generally healthier and less likely to need insurance, they benefit from the elimination of the Obamacare tax penalty.

Key Takeaways

•     Business tax cuts are permanent while the individual cuts expire in 2025.
•     Individual tax rates have been lowered, the standard deduction raised, and personal exemptions were eliminated.
•     Many itemized deductions have been removed.
•     The maximum corporate tax rate has been lowered from 35% to 21%.
•     Passthrough companies receive a 20% deduction on qualified income.
•     The plan encourages corporations to repatriate foreign earnings.
•     The Act will add $1 trillion to the debt over the next 10 years.

Individual Income Tax Rates

The TCJA lowered tax rates, but it kept seven income tax brackets. The brackets correspond with more favorable spans of income under the TCJA, however. Each bracket accommodates more income.

The highest tax bracket starts at just over $500,000 in taxable income for single people as of 2019, and at $600,000 for married couples. These taxpayers are subject to a 37% rate on incomes over these thresholds after exemptions and deductions.7

2017 Income Tax Rate 2019 Income Tax Rate Income for Those Filing As Single Income for Those Filing Jointly
10% 10% $0-$9,700 $0-$19,400
15% 12% $9,701-$39,475 $19,401-$78,950
25% 22% $39,476-$84,200 $78,951-$168,400
28% 24% $84,201-$160,725 $168,401-$321,450
33% 32% $160,726-$204,100 $321,451-$408,200
33%-35% 35% $204,101-$510,300 $408,201-$612,350
39.6% 37% More than $510,300 More than $612,350

These income levels are adjusted somewhat each year to keep pace with inflation.

The Standard Deduction vs. Itemized Deductions

A single filer's standard deduction increased from $6,350 in 2017 to $12,200 in 2019. The deduction for married joint filers increases from $12,700 in 2017 to $24,400 in 2019.7

The Tax Foundation estimated in September 2019 that only about 13.7% of taxpayers would itemize on their 2018 returns due to these changes. It will save them time in preparing their taxes. It might also hurt the tax preparation industry and decrease charitable contributions, which are an itemized deduction.8

Those Lost Personal Exemptions

Before the TCJA, taxpayers could subtract $4,050 from their taxable incomes each for themselves, their spouses, and each of their dependents.9

Do the math: That works out to $20,250 for a married couple with three children. Now add the standard deduction for married taxpayers filing joint returns, which was $12,700 at that time, for a total of $32,950.

Now fast forward to 2019 after the passage of the TCJA. There are no more personal exemptions, so all that couple could claim would be the $24,400 standard deduction. That's $8,550 more income that they'll be paying taxes on, assuming in both scenarios that they're not claiming any other tax deductions or credits.

Fewer Itemized Deductions

The TCJA eliminates most miscellaneous itemized deductions. That includes tax preparation fees, job expenses, and investment fees.

•     The deductions for tax preparation fees and unreimbursed employee expenses are gone under the TCJA.

•     The TCJA limits the deduction on mortgage interest to the first $750,000 of the loan. Mortgage holders who took out their loan prior to December 16, 2017, aren't affected. In addition, interest on home equity loans or lines of credit can no longer be deducted, unless the proceeds were used to buy, build, or substantially improve the home.10

•     The state and local tax (SALT) deduction remain in place, but it's been capped at $10,000. They can deduct property taxes, and either state income or sales taxes.

•     The deduction threshold for most charitable contributions got better. You can now claim a deduction for up to 60% of your AGI rather than 50%.

•     Deductions for casualty losses are limited under the TCJA to those that occur in federally-declared disaster areas.

•     The threshold for the medical expense deduction dropped from 10% to 7.5% of AGI, so taxpayers can claim larger deductions—the portion of what they pay that exceeds 2.5% less of their income. This change was set to expire at the end of 2019, but the Further Consolidated Appropriations Act of 2020 has resurrected it. The 7.5% threshold remains in place until the end of 2020.11

Another important change is that the TCJA did away with the Pease limitation on itemized deductions. This tax provision previously required that taxpayers had to reduce their itemized deductions by 3% for every each dollar of taxable income over certain limits, up to a total of 80%. This is no longer the case while the TCJA is in effect.12

Above-the-Line Adjustments to Income

The above-the-line deduction for moving expenses has been eliminated, except for active-duty members of the military.13

Those paying alimony can no longer deduct it as an adjustment to income. This change is effective for divorces granted beginning Jan. 1, 2018.14

The TCJA keeps the deduction for retirement savings. It also allows those age 70½ or older to directly transfer up to $100,000 a year to qualified charities from their individual retirement accounts. This transfer counts toward the taxpayer’s required minimum distribution for the year, but it isn’t included in the taxpayer’s adjusted gross income.15

The TCJA also keeps the deduction for student loan interest.

Changes to Tax Credits

The TCJA increased the Child Tax Credit from $1,000 up to $2,000. Even parents who don't earn enough to pay taxes can claim a refund of the credit up to $1,400 after it erases any tax they might owe.

The TCJA also introduced a $500 Credit for Other Dependents, which helps families whose dependent children no longer meet the strict criteria of child dependents because they've aged out, as well as families caring for elderly parents.16

These tax credits are fully available to taxpayers with modified adjusted gross incomes of up to $200,000 for single filers and $400,000 for married taxpayers who file joint returns. They were phased out and eliminated at $75,000 and $110,000 respectively before the TCJA.

The Obamacare Tax

The TCJA repeals the Obamacare tax penalty that was charged to those without health insurance, effective 2019.

The Alternative Minimum Tax

The plan keeps the Alternative Minimum Tax. It increases the exemption from $54,300 to $70,300 for singles and from $84,500 to $109,400 for joint.17 The exemptions phase out at $500,000 for singles and $1 million for joint.

Business Tax Rates

The Act lowers the maximum corporate tax rate from 35% to 21%, the lowest since 1939.18 The United States has one of the highest rates in the world. But most corporations don't pay the top rate.

On average, the effective rate is 18.6%. Large corporations have tax attorneys who help them avoid paying more.

Business Deductions

It offers a 20% standard deduction on qualified income for pass-through businesses. This deduction ends after 2025. Pass-through businesses include sole proprietorships, partnerships, limited liability companies, and S corporations.19 They also include real estate companies, hedge funds, and private equity funds. The deductions phase out for service professionals once their income reaches $157,500 for singles and $315,000 for joint filers.

The Act limits corporations' ability to deduct interest expense to 30% of income. For the first four years, income is based on EBITDA. This acronym refers to earnings before interest, tax, depreciation, and amortization. Starting in the fifth year, it's based on earnings before interest and taxes. That makes it more expensive for financial firms to borrow. Companies would be less likely to issue bonds and buy back their stock. Stock prices could fall. But the limit generates revenue to pay for other tax breaks.

It allows businesses to deduct the cost of depreciable assets in one year instead of amortizing them over several years. It does not apply to structures. To qualify, the equipment must be purchased after September 27, 2017, and before January 1, 2023.

The Act stiffens the requirements on carried interest profits.20 Carried interest is taxed at 23.8% instead of the top 39.6% income rate. Firms must hold assets for a year to qualify for the lower rate. The Act extends that requirement to three years. That might hurt hedge funds that tend to trade frequently. It would not affect private equity funds that hold on to assets for around five years. The change would raise $1.2 billion in revenue.

It retains tax credits for electric vehicles and wind farms.

It cuts deductions for client entertainment from 50% to zero.21 It retained the 50% deduction for client meals.

Other Changes to Corporate Taxes

The Act eliminates the corporate AMT.  The corporate alternative minimum tax had a 20% tax rate that kicked in if tax credits pushed a firm's effective tax rate below 20%. Under the AMT, companies could not deduct research and development spending or investments in a low-income neighborhood. The elimination of the corporate AMT adds $40 billion to the deficit.

Trump's tax plan advocates a change from the current "worldwide" tax system to a "territorial" system.22 Under the worldwide system, multinationals are taxed on foreign income earned. They don't pay the tax until they bring the profits home. As a result, many corporations leave it parked overseas. Under the territorial system, they aren't taxed on that foreign profit. They would be more likely to reinvest it in the United States. This will benefit pharmaceutical and high tech companies the most.

The Act allows companies to repatriate the $2.6 trillion they hold in foreign cash stockpiles. They pay a one-time tax rate of 15.5% on cash and 8% on equipment. The Congressional Research Service found that a similar 2004 tax holiday didn't do much to boost the economy. Companies distributed repatriated cash to shareholders, not employees.

It allows oil drilling in the Arctic National Wildlife Refuge. That's estimated to add $1.1 billion in revenues over 10 years. But drilling in the refuge won't be profitable until oil prices are at least $70 a barrel.

How It Affects Businesses

The tax plan helps businesses more than individuals. Business tax cuts are permanent, while the individual cuts expire in 2025. But that could help employees. For example, the nation's largest private employer, Walmart, said it would raise wages. It also said it would use the money saved by the tax cuts to give $1,000 bonuses and increase benefits.23

By March 2018, the tax cut spurred numerous mergers. Corporations were using the cash windfalls to award dividends and buy back their own stock.

The repatriation could also raise Treasury note yields. Corporations hold most of the cash in 10-year Treasury notes. When they sell them, the excess supply would send yields higher.

Impacts on the Economy

The Act makes the U.S. progressive income tax more regressive. Tax rates are lowered for everyone, but they are lowered the most for the highest-income taxpayers.

The increase in the standard deduction could benefit millions of taxpayers. But for many income brackets, that won't offset lost deductions.

The Trump tax cuts cost the government even more. The Act increases the deficit by $1 trillion over the next 10 years according to the Joint Committee on Taxation. It says the Act will increase growth by 0.7% annually, reducing some of the revenue loss from the $1.5 trillion in tax cuts.24

The Tax Foundation made a slightly different estimate. It said the Act will add almost $448 billion to the deficit over the next 10 years. The tax cuts themselves would cost $1.47 billion. But that's offset by $700 billion in growth and savings from eliminating the ACA mandate. The plan would boost gross domestic product by 1.7% a year. It would create 339,000 jobs and add 1.5% to wages.3

The U.S. Treasury reported that the bill would bring in $1.8 trillion in new revenue. It projected economic growth of 2.9% a year on average. The Treasury report is so optimistic because it assumes the rest of Trump's plans will be implemented.25 These include infrastructure spending, deregulation, and welfare reform.

The JCT analysis is probably the most accurate since it only analyzes the cost of the tax cuts themselves. The tax cuts' increase to the debt means that budget-conscious Republicans have done an about-face. The party fought hard to pass sequestration. In 2011, some members even threatened to default on the debt rather than add to it. Now they say that the tax cuts would boost the economy so much that the additional revenues would offset the tax cuts.

The impact on the national debt will eventually be higher than projected. A future Congress will probably extend the tax cuts that expire in 2025.

An increase in sovereign debt dampens economic growth in the long run. Investors see it as a tax increase on future generations. That's especially true if the ratio of debt-to-GDP is near 77%. That's the tipping point, according to a study by the World Bank.26 It found that every percentage point of debt above this level costs the country 1.7% in growth. The U.S. debt-to-GDP ratio was 104% before the tax cuts.

Supply-side economics is the theory that says tax cuts increase growth. The U.S. Treasury Department analyzed the impact of the Bush tax cuts.27 It found that they provided a short-term boost in an economy that was already weak.

Also, supply-side economics worked during the Reagan administration because the highest tax rate was 70%. According to the Laffer Curve, that's in the prohibitive range. The range occurs at tax levels so high that cuts boost growth enough to offset any revenue loss. But trickle-down economics no longer works because the 2017 tax rates are half of what they were in the 1980s.

The most significant tax cuts should go to the middle class who are more likely to spend every dollar they get. The wealthy use tax cuts to save or invest. It helps the stock market but doesn't drive demand. Once demand is there, then businesses create jobs to meet it. Middle-class tax cuts create more jobs. But the best unemployment solution is government spending to build infrastructure and directly create jobs.

Trump Versus Bush and Obama Tax Cuts

The biggest difference between the Trump and Bush or Obama tax cuts is the timing. The Trump tax cut occurred while the economy was solidly in the expansion phase of the business cycle.

The Bush tax cuts occurred during the 2001 recession and the years immediately following. Congress was concerned that the recession would worsen without the cuts.

President Obama cut taxes in the 2009 economic stimulus package. Between that and the government spending, the recession ended in July. The 2010 Obama cuts occurred only two years after the 2008 financial crisis.

Trump's Promises That Aren't in the Plan

On October 23, 2018, Trump proposed a new 10% tax cut focused on the middle class. But the plan fell apart after the mid-term elections.

Trump's 2016 proposal allowed up to $2,000 to be deposited tax-free into a Dependent Care Savings Account.28 The account would grow tax-free to pay for a child's education. Taxpayers could also receive a rebate for the Earned Income Tax Credit and deposit it in the DCSA.

Trump promised to end the AMT for individuals.

Trump promised to increase taxes on carried interest profits, not just stiffen requirements. But lobbyists for those industries convinced Congress to ignore Trump's pledge.

Trump promised to end the Affordable Care Act tax on investment income.

The Bottom Line

The Tax Cuts and Jobs Act significantly changed personal and corporate taxes. Corporations benefit more since their cuts are permanent while the individual cuts expire in 2025.

Individual tax rates have been lowered, the standard deduction raised, and personal exemptions were eliminated. Many itemized deductions are removed while the medical expense deduction is expanded. Families with several children and elderly dependents may pay more taxes. with the elimination of exemptions. Healthy, young citizens who without health insurance would pay less with the elimination of the Affordable Care Act penalty. Those who earn more than 95% of the population will see an increase of over 2% in after-tax income while the bottom 20% will enjoy only a 0.4% increase.

The maximum corporate tax rate has been lowered from 35% to 21%. Passthrough companies receive a 20% deduction on qualified income. The corporate AMT has been eliminated. The plan encourages corporations to repatriate foreign earnings.

The Tax Act may curtail economic growth in the long run. According to the Joint Committee on Taxation, the Act will add $1 trillion to the debt over the next 10 years. Since tax rates weren't prohibitive to start with, their benefits won't “trickle-down” to boost consumerism and economic growth. Since they occurred during the expansion phase, they won't generate many new jobs.

This article provides an overall summary. The Act is so complex that it affects each taxpayer differently. Consult a tax expert to determine the Act's impact on your personal situation. If you would like Congress to change the Act, then contact your U.S. Representatives and Senators and tell them.