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Effects of the Tax Cuts & Jobs Act (Tax Reform)

Led by efforts from President Donald Trump, the Tax Cuts and Jobs Act (TCJA) was enacted in December 2017 and was the largest overall change to tax laws in more than 30 years1. But what exactly did this tax reform do, and does it REALLY matter? 

What Did TCJA Do?

Let me begin by saying the TCJA tax reform document is over 1,000 pages of tax and legal jargon! No, we didn’t read them all, but we did do extensive research and consulted many of our resources to determine the biggest potential effects. To stay conversationally in the know, here are the three biggest changes for individuals under the new tax law:

1. Tax brackets changed, maxing out at 37% instead of 39.6%

2017
10%
15%
25%
28%
33%
35%
39.6%
2018
10%
12%
22%
24%
32%
35%
37%


2. Personal Exemptions were eliminated but Standard Deductions and Child Tax Credit nearly doubled, which may simplify your taxes (by not having to itemize).


2017
2018
2018 (over 65)
Single
$6,350
$12,000
$13,600
Married Filing Jointly
$12,700
$24,000
$26,600
Married, Filing Separately
$6,350
$12,000
$13,300
Head of Household
$9,350
$18,000
$19,600
Child Tax Credit
$1,000
$2,000
$2,000


3. State and local taxes/home mortgages deductions decreased. 


2017
2018
State & Local Property, Income, & Sales Tax Limit

n/a (fully   deductible)

$10,000
Home Mortgage Interest Limit
$1,000,000
$750,000


Because companies abide by different tax laws than individual filers, it’s only prudent to point out the WHOPPING change for the corporate income tax: the tax rate went from 35% to 21%3.

In addition to the above changes in numbers, the new tax law drastically simplified the filing process – so much so that 28.5 million filers4 are better off taking the new standard deduction (listed in the table above) than itemizing. 

This simplification not only reduced the stress of filing and margin for error, but it reduced the time to complete the filing process by 4-7%4. Sign me up for less time spent on taxes! 

Does it REALLY Matter?

When the IRS began releasing stats about the initial effects of the TCJA it wasn’t promising - first reports had refunds down 8% compared to last year5. However, fast forward a few weeks and at the end of February the average refund was up $406. Even now in mid-April it’s just too early to tell. Afterall, the IRS’s most recent tax stats are from 20167 so there’s potential we won’t truly begin to understand the impact until 2022!

That being said, debates will continue long after the April 15th tax deadline to determine if the TCJA tax reform effectively accomplished its intended goals and/or promises. As with all things political, one can (legally) finagle statistics, graphics, etc. to display information to suit a particular point. For example, treasury estimates had the TCJA benefits as high as $1.8 trillion over 10 years8 while other reports had the cost of TCJA being $1.5-$1.8 trillion9 – a $3.6 trillion swing! 

My goal is not to get political, so again here are a couple highlights to stay casually informed:

  1. High Income: If you have a very high income, the tax plan helps you the most. The Tax Foundation said those who earn more than 95 percent of the population would receive a 2.2 percent increase in after-tax income.  Those in the 20 to 80 percent range would receive a 1.7 percent increase. The Tax Policy Center said those in bottom 20 percent would only receive a 0.4 percent increase8.
  2. Businesses will benefit more from the TCJA changes because the new laws for businesses are permanent, while many of the individual changes are sunset provisions (meaning they expire and revert). It would require another tax change (and the whole dog & pony show that goes with it) to alter the business law versus the individual provisions are set to expire in 2025.

Regardless of where you fall on the political spectrum, the odds are you’ll have been affected in some way by the TCJA tax reform. Part of sound financial wellness is having a qualified tax professional who understands how to help you navigate the TCJA and the implications for you. 

As honored members of your financial wellness team we welcome the opportunity to work with you and your tax professional to help maximize your hard-earned dollars. 




Disclaimer: Custom Wealth Management, LLC does not provide tax or legal advice.

Resources:

  1. Irs.gov. (2019). Tax Reform | Internal Revenue Service. [online] Available at: https://www.irs.gov/tax-reform [Accessed 6 Mar. 2019].
  2. The Washington Post. (n.d.). Read the full GOP tax bill. [online] Available at: https://apps.washingtonpost.com/g/documents/business/read-the-full-gop-tax-bill/2678/ [Accessed 6 Mar. 2019].
  3. Pomerleau, K. (2018). US Corporate Income Tax Now More Competitive | Tax Foundation. [online] Tax Foundation. Available at: https://taxfoundation.org/us-corporate-income-tax-more-competitive/ [Accessed 6 Mar. 2019].
  4. York, E. and Muresianu, A. (2018). TCJA Simplified Tax Filing Process for Millions of Households. [online] Tax Foundation. Available at: https://taxfoundation.org/the-tax-cuts-and-jobs-act-simplified-the-tax-filing-process-for-millions-of-households/ [Accessed 6 Mar. 2019].
  5. Cavaliere, V. (2019). Average tax refund down 8% so far this season. [online] CNN. Available at: https://www.cnn.com/2019/02/09/politics/tax-code-early-returns-data/index.html [Accessed 6 Mar. 2019].
  6. Borak, D. (2019). Average tax refunds up $40 for 2019. [online] CNN. Available at: https://www.cnn.com/2019/02/28/economy/irs-refunds-tax-law/index.html [Accessed 6 Mar. 2019].
  7. Irs.gov. (2019). Statistics | Internal Revenue Service. [online] Available at: https://www.irs.gov/statistics [Accessed 29 Mar. 2019].
  8. Amadeo, K. (2019). How Trump's Tax Reform Plan Affects You. [online] The Balance. Available at: https://www.thebalance.com/trump-s-tax-plan-how-it-affects-you-4113968 [Accessed 18 Mar. 2019].
  9. Long, H. (2019). [online] Available at: https://www.washingtonpost.com/news/wonk/wp/2017/12/11/the-treasury-has-finally-explained-how-the-trump-tax-plan-would-pay-for-itself-and-its-already-being-attacked/?utm_term=.c826146cc8ef&wpisrc=nl_finance202&wpmm=1 [Accessed 18 Mar. 2019].
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