Trump's 2018 Tax Reforms and What They Mean for You and Your Family

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Just before Christmas last year, the Tax Cuts and Jobs Act was signed by President Trump. The Act is the landmark legal measure of the President's first year in office and represents the most significant change to the tax code for over 30 years.

With most provisions coming into effect from the beginning of 2018, the Act reduces the tax rate for corporations to 21%, down from 35%, while the top tax rate for individuals decreases to 37%. Furthermore, the Act removes personal exemptions, doubles standard deductions and reduces rates for income tax.

While the changes to corporate tax rates and most other provisions affecting business are permanent, changes to the tax rules for individuals are set to expire at the close of 2025. The average worker won't notice the effects of the Act until they receive their paycheck in February where they will see a difference in their withheld tax. Tax returns filed in April of 2019 for the will, of course, be further reflection of the Act's provisions.

Below is a description of the core changes to the tax code.

1)  Tax bracket

It was Trump's original intention to cut the amount of income tax brackets in the federal tax system to four down from seven. However, the final bill does maintain the number of brackets and instead changes the percentage of income tax paid and the thresholds of these brackets. In short, the majority of taxpayers will see a reduction in the amount of income tax they pay (further details are available online). The tax brackets are now:

1. 10%
2. 12%
3. 22%
4. 24%
5. 32%
6. 35%
7. 37%

2)  Tax exemptions and deductions

The Act includes a significant rise in standard deductions for single tax-filers and married couples who file their taxes jointly. Starting at $12,000 for single tax-payers and $24,000 for married couples, deductions will be indexed according to inflation until these changes expire at the end of 2025. Deductions will then return to their 2017 levels, although it is expected they will be re-indexed to take inflation into account.

Moreover, the personal tax exemption of $4,050 is removed completely (until 2026) by the provisions of the Act. The doubling of the Child Tax Credit (to $2,000) is intended to offset the removal of the exemption, as is the introduction of a tax credit of $500 for non-child dependents, changes which again expire in 2026.

Under the Act, mortgage interest deductions are subject to a new limit until 2026, as are local and state tax deductions, which are capped at $10,000. For newly-acquired houses, the deduction cap for loan balances falls to $750,000, while loan deductions for home equity no longer exist at all.

Starting from 2018, several tax deductions are removed in full, such as moving costs (excluding those for Armed Forces personnel in active service), tax preparation fees, unreimbursed employee expenses and theft and casualty losses (unless they are linked to a disaster declared by the President). Alimony payment deductions will also be removed, but only for couples who divorce in 2019 and after.

Importantly, the Act will impact your tax return for April 2019 but not April 2018, with the only key retroactive change (affecting the 2017-2018 tax year only) being the drop in the deduction for medical expenses to 7.5% of adjusted gross income (AGI) from 10% of AGI.

3)  Health care

The Affordable Care Act is still alive and well following Trump's tax reforms, despite repeated claims that Obamacare is on its way out. Consequently, if you fail to show proof that you held health insurance in 2017, you will be charged a penalty fee. However, the individual mandate (i.e. the penalty for not securing health insurance) is eliminated by the Act effective as of the close of 2018.

4)  Pass-through income

As of 2018, anyone who receives pass-through income via their business will benefit from a 20% tax deduction for qualified business income (restrictions and limits apply). Your tax adviser will be able to inform you of the particulars.

5)  Alternative minimum tax

The Act provides for a rise in alternative minimum tax (AMT) limits. For single tax-filers, the AMT limit is now $70,300, and for married people who file jointly it is $109,400. Furthermore, the thresholds at which the exemption levels no longer apply have jumped dramatically to $500,000 for single-filers and $1,000,000 for joint-filers. While these increases expire at the close of 2025, inflation-linked AMT adjustments are a permanent change.

6)  Inflation

Typically, tax thresholds and brackets are adjusted in line with inflation. The Act introduces changes to the way inflation is calculated.

Previously, the consumer price index for urban consumers (CPI-U) was applied to determine inflation rates. In brief, the CPI-U tracks variations in the costs of services and goods purchased by the average US household.

In future, chained CPI will be utilized by the IRS to measure inflation. This tool tends to indicate lower inflation rate rises, and thus may ultimately decrease tax credit gains and progressively push earners into higher brackets for income tax.