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What the Trump Tax Plan Means for You?

There has been much controversy surrounding the trump tax plan. This post is designed to take an impartial and fair review of the tax deal based on fact. We have no political biases and just wanted to share with you some key updates in the bill. In addition, we go over a simple tax analysis to illustrate these changes from the current system.

Standard Deduction

For 2018 the Standard Deduction will be nearly doubled. For single the amount is $12,000 and for married individuals filing jointly it is $24,000. This is much higher than the amounts from 2017 which were $6,350 for single filers and $12,700 for joint filers. The higher standard deduction benefits taxpayers because it allows for a larger amount to be deducted from taxable income.

Personal Exemption

As you might have read, the personal exemption has been eliminated for 2018. For 2017 exemption was worth $4,050 for each person you claimed on your return. For example, if you file jointly with your spouse you would have a total of 2 personal exemptions ($8,100). The total value of the personal exemption would then be deducted from your taxable income. The loss of the personal exemption hurts taxpayers because you lose a deduction that would lower your tax bill.

Cap on State & Local Taxes 

One of the most controversial aspects of the Trump tax plan is the cap on State & local taxes. The total amount taxpayers may deduct from state and local income taxes is limited to $10,000. The limit is the same for married taxpayers filing jointly. The cap applies in aggregate to all state and local levies. Simply put, you can deduct property taxes, state income taxes, local income taxes, and sales taxes, however the total deduction available is limited to $10,000. Residents in high tax states such as New York, New Jersey, Connecticut, California, and Illinois would be adversely affected because they no longer would be able to deduct all of their taxes. However for the remaining states with lower or no state income taxes, this limitation would not affect them because their total taxes would fall under the $10,000 cap.

Reduced Tax Rates Across the Board – The tax plan will reduces the tax rates across most tax brackets. Here are the Rates from Forbes:

Old Tax RateNew Tax RateSingleMarried Filing Jointly

10%

10%

Up to $9,525

Up to $19,050

15%

12%$9,526 to $38,700

$19,051 to $77,400

25%

22%$38,701 to $82,500$77,401 to $165,000

28%

24%$82,501 to $157,500

$165,001 to $315,000

33%

32%$157,501 to $200,000

$315,001 to $400,000

35%

35%$200,001 to $500,000

$400,001 to $600,000

39.6%37%over $500,000

over $600,000

 

What Does the Trump Tax Plan Mean for American Families?

Scenario: Family of 4 with 2 children under age 17, Household income $100,000

2017

2018

Gross Income

$100,000$100,000

Less: Standard Deduction

$12,700

$24,000

Less: Personal Exemptions

$16,200 ($4,050 x 4 people)

Eliminated

Taxable Income$71,100

$76,000

 

Before you draw any conclusions we still need to apply the tax rates and the new child tax credit to see the final result. In continuation of the above example, here are the applicable tax rates and how much tax would be due in each year (before any credits):

Tax Rates

2017

2018

10% Tax on Income up to $18,650

10% Tax on Income up to $19,050

15% Tax on Income Between $18,651 – $71,100

12% Tax on Income Between $19,051 – $76,000

Total Tax Bill (Before Child Tax Credit): $9,732

Total Tax Bill (Before Child Tax Credit): $8,739

In spite of taxable income for 2017 being lower, the actual tax bill (before any credits) is still higher than 2018. This is because the reduced rate more than makes up for the fact that more income is subject to tax. 

Trump Tax Plan Expands Child Tax Credit

Child Tax Credit – For all its shortfalls, the expanded Child tax credit is one of its best improvements in the Trump tax plan. Not only will more people qualify for the credit but the amount of the credit has been doubled. For 2018 the Child tax credit will be $2,000 per child instead of $1,000. This will significantly benefit taxpayers. I am sure we can all agree that $1,000/child doesn’t provide much relief with the rising costs of childcare. An additional $1,000/child would certainly go a long way to easing the burden.

 

Now let’s see how these changes will affect this families taxes. In continuing with the above example:

2017

2018

Total Tax Bill (Before Child Tax Credit): $9,732

Total Tax Bill (Before Child Tax Credit): $8,739

Less: Child Tax Credit $2,000

Less: Child Tax Credit: $4,000

 

Final Tax Bill: $7,732

 

Final Tax Bill: $4,739

Tax Planning Can Help You Save on Your Taxes

In spite of the loss of the personal exemption, our hypothetical family of 4 with 2 children saw a significant tax cut. This is explained by the lower tax rates and the enhanced child tax credit. Specifically, the trump tax plan reduced this families final tax bill by 38.7%. Of course, your situation may be different than the above scenario. If you are interested in a custom tax analysis based on your unique situation, we can help! In addition, if you are interested in having us implement a tax reduction plan check our tax planning page. You can also contact us or use the messenger at the bottom for a quick response.