Tax Reform: How It Affects You

President Trump signed the Tax Cuts and Jobs Act into law at the end of 2017. This event not only solidified the first major legislative victory for the new administration, but it marked the first time in more than 30 years that major reforms to the U.S. tax code have been enacted.

The legislation will reduce tax revenue by nearly $1.5 trillion during the next decade by making substantial cuts to the U.S. corporate rate, lowering rates for most individuals and families, and increasing the child tax credit, among other things. According to the Tax Policy Center, after-tax income will increase by an average of 2.2 percent for taxpayers in 2018 (see figure 1). While the majority of taxpayers are set to benefit under the new tax plan, changes to the code are all about trade-offs. Let’s take a look at the major provisions.

The new tax plan will retain seven tax brackets, but with modified income segments (see figures 2 and 3).

The standard deduction will be doubled. This will greatly reduce the need to itemize and negate some of the impact from expiring or reduced exemptions. The deduction for single filers goes from $6,300 to $12,000, and for married filing jointly from $12,700 to $24,000.

Personal exemptions are eliminated. Under the previous rules, taxpayers could claim a $4,050 personal exemption for themselves, their spouse and each dependent. This change could increase the tax liability for some families.

The child tax credit will be doubled from $1,000 to $2,000, and the refundable portion will be increased from $1,100 to $1,400.

The health care mandate is eliminated. The tax penalty for not having health insurance will no longer apply starting in 2019.

The mortgage interest rate deduction cap will be reduced from $1 million to $750,000. This will largely affect expensive coastal cities and higher-income households. Most taxpayers will find it more advantageous to use the newly doubled standard deduction.

The deduction for state and local taxes will be capped at $10,000. The deduction was previously uncapped and benefited highly-taxed and high-earning localities.

Businesses will arguably benefit the most under the new tax plan. Reforming the corporate tax rate has been a leading issue for the president and the new administration, and this bill delivers on that promise. While some have criticized the Tax Cuts and Jobs Act for benefiting corporations more than individuals, there have been signs that the corporate changes are helping workers. Since the signing of the legislation, numerous companies such as Walmart, Comcast, AT&T and many others have announced employee bonuses and, in some cases, increased wages.

The top corporate rate will fall from 35 percent to 21 percent (see figure 4). At 35 percent, the U.S. had the highest corporate tax rate of developed economies and many cited the high rate as a detriment to U.S. competitiveness abroad.

Small businesses organized as pass-through entities can take a 20 percent deduction on their business income. Roughly 95 percent of all businesses in the U.S. are classified as pass-through.

Section 179 expensing will increase from $500,000 to $1 million. Section 179 of the tax code was designed to encourage businesses to invest in equipment, machinery, computers, software and other large-expenditure items, by allowing them to deduct the expenses from their income.