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Trump’s Tax Reform: What You Need to Know About the Tax Cuts and Jobs Act

Kimberly Schulte, News Editor

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On December 22nd, 2017, President Donald Trump signed the Tax Cuts and Jobs Act into law after the Senate and House of Representatives voted on the bill just two days before-hand. The Senate passed the bill with a 51-48 vote, and the House passed it with a 224-201 vote; zero House Democrats supported the legislation and 12 Republicans voted no.

To the ordinary, everyday citizen, tax reform legislation can be a little confusing and hard to understand so, what exactly does this new law mean for American taxpayers?

Perhaps the most major point of the tax reform is that it permanently cuts corporate tax rates and temporarily cuts individual tax rates. This could mean a multitude of different things for us, but before we can discuss the impact it will have, it’s important to know and understand the specific changes that you as an American citizen will see in the years to come.

Tax Cuts and Jobs Act (TCJA), net tax benefits by type of taxpayer, in total over ten years. (Senate Version).

Temporary tax modifications in this legislation include things like an increase in the standard deduction, elimination of personal exemptions, and a small increase in Child Tax Credit (CTC), which are all set to expire in 2025.

When doing their taxes, taxpayers may choose between the standard deduction or itemized deductions, but it’s most common for people to just pick the cheapest option for them: the lesser amount of tax payable. If you’re someone who itemizes your taxes, that means that you list all of your assets separately. Under U.S. tax law, the standard deduction is a dollar amount in which non-itemizers may subtract from their income before income tax is actually applied. The new tax reform law raises the standard deduction from $13,000 to $24,000 for married couples who file jointly and $6,500 to $12,000 for people who file as singles.

Another revision that will take place in the years to come is an increase in Child Tax Credit. The CTC was raised to $2,000, with $1,400 refundable credit and a non-refundable $500 credit for non-child dependents. For those who do have a family, this change in CTC could be significantly beneficial, but it can only be claimed if the taxpayer provides the child’s Social Security number.

Congressional Budget Office (CBO) data on share of U.S. federal revenues by tax type between 1967 and 2016.

Since the new standard deduction is nearly doubled in amounts and the CTC is raised, the Tax Cuts and Jobs Act also eliminates personal exemptions altogether. This basically prevents people from being able to exempt from paying taxes on some income for themselves and their dependents. Personal exemption was previously set at $4,150, meaning that taxpayers could subtract that amount from their income for each person that was claimed; this is unfortunately no longer an option for American taxpayers.

In addition to this, the Tax Cuts and Jobs Act lowers most rates in the seven individual income tax brackets. Each tax bracket is assigned a different rate which will now range from 10% to 37% under the new tax laws. While the money for each tax bracket rate varies for single filers, married joint filers, etc., individual tax rates are significantly decreased across the board with the exception of the 10% and 35% rates. These decreases are also set to expire in 2025.

Other brief modifications include things like a decrease in the mortgage interest deduction, and suspensions of other itemized deductions like moving expenses, and union dues. Some are worried that the decrease in the mortgage interest deduction could lower public incentive to build and buy homes in the future. In a short-term sense, none of these changes seem particularly terrible for the American people, but because most of the individual tax relief in the new tax legislation is only temporary, many fear that the result is going to be a tax increase in 2027 that would affect more than half of the country’s taxpayers.

All of these temporary revisions start this year and are set to expire nine years down the road, but what about the permanent revisions?

There seem to be two major ones outlined in the Tax Cuts and Jobs Act. At a corporate tax rate of 35%, we took the metaphorical trophy for the highest rate of any large, developed country so, the first one involves a rather hefty tax break for corporations by reducing the rate to 21%. Those who support this portion of the law argue that it will reduce incentives for corporate inversion, which would essentially make companies less likely to “send” jobs to a different country with a lower corporate tax rate.

CBO expectations that the TCJA would add up to 13 million more people without health insurance.

The concept of bringing job opportunities back to the country for the American people is something President Trump advocated for a lot during his campaign in the 2016 presidential election.

The other permanent change ends the individual mandate that was imposed and took effect in 2014 after the passing of the Affordable Care Act in 2010. It is a health insurance mandate in which insurance companies were restricted from altering rates based on the individual’s current health when buying the insurance. This will cause around 13 million additional people to lack health insurance and more than likely push premiums up by about 10%. The eradication of the individual mandate is supposed to take effect in 2019; this repeal is expected to reduce federal deficits between 2018 and 2027.

Regardless of this, the tax overhaul is expected to raise the federal deficit by hundreds of billions of dollars over the course of the next ten years anyway. Estimating numbers vary depending on future economic growth following the reform legislation, so there are no definitive answers on any reduction or increase in national debt.

Opinions amongst the average U.S. citizens on the tax reform legislation seem to vary drastically. On one hand, it is argued that tax breaks for the richer precentage of the population and corporations will hurt the hard-working Americans instead of helping. On the other hand, the decreased corporate tax rate is meant to benefit those hard-working individuals by bringing work opportunities back to the country. The elimination of the individual mandate and the expiration dates on things like the increased standard deduction and the boosted CTC are other things that people seem to be particularly upset about with the new law.

While predictions can be made, no definitive outcome can be expected because the result of the tax reform is dependant on so many other factors. Unfortunately for American taxpayers, it is more of a wait-and-see kind of situation.

You can read the official document of the Tax Cuts and Jobs Act here.

 

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2 Comments

2 Responses to “Trump’s Tax Reform: What You Need to Know About the Tax Cuts and Jobs Act”

  1. Debbie Scheetz on January 22nd, 2018 12:07 pm

    Excellent article. Very well written!

    [Reply]

  2. Joseph Schulte on January 25th, 2018 8:55 pm

    Very informational. I am in the camp of the tax cut providing more jobs for unemployed Americans by way of future corporate investments and repatriating their offshore money. Hence, the Apple deal that recently occurred.

    [Reply]

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Trump’s Tax Reform: What You Need to Know About the Tax Cuts and Jobs Act