Before we begin, a tax change of any size will have three effects on the residents of the United States: (1) some will benefit handsomely, (2) some will be negatively impacted, and (3) some will be impacted positively in some areas and negatively in others. We have dived into the 429-page plan and attempted to summarize the items that affect individuals and families. Here is the skinny on the Trump Tax Plan:
Let’s meet four individuals: Larry, Maggie, Sue, and Ricardo.
Larry is a W2 employee who makes $65,000.00 per year; he is not married and has a 10-year-old child. Larry’s annual tax withholdings are as follows: Federal – $10,401.12, State and Local – $5,624.40
Maggie is a W2 employee who makes $110,000 per year, she is single, doesn’t have any children and owns a home. Maggie’s annual tax withholdings are as follows: Federal $22,003.68, State and Local – $10,691.52. Her annual property taxes are $12,200.00 and mortgage interest paid during the year would be around $5,600.00.
Sue is retired, generates about $140,000.00 annually in taxable income between retirement distributions, supplemental payments and portfolio disbursements. She pays about $35,000.00 annually to manage her robust portfolio, she also gives about $20,000.00 annually to a specific charity. Her home is paid for, but annual property tax amount is about $10,500.00 (reduced rate for seniors).
Ricardo makes $275,000.00 per year from his employer, he is married, joint filer with three children under 14 years old. His annual tax withholdings are as follows: Federal – $56,430.00, State and Local – $30,542.40. Ricardo’s property taxes annually are $16,650.00 and mortgage interest paid during the year would be around $13,200.00, of which $3,000.00 is from a home equity line. Charitable donations are typically about $10,000.00 annually and he pays about $8,000.00 per year in investment management fees.
Now that we have met our four subjects, lets see how the tax plan affects them. Let’s start with the changes!
Change #1: Paycheck Changes Are Coming
In February 2018, the IRS will release new withholding tables, so all employees will begin seeing changes in their paychecks starting in February. Larry, Maggie and Ricardo will be impacted with this change. The degree of the change is yet to be determined as the IRS has not released these new tables yet.
Change #2: Tax Brackets Are Changing
Under the 2017 rules there are seven tax brackets which start at 10% and max out at 39.6%, under the new rules starting January 1, 2018. We still have seven tax brackets, but they are modified, and they start at 10% but max out at 37%. Here is how it affects our four subjects:
Subject Tax Bracket in 2017 Tax Bracket in 2018 – 2025
Larry 25% 22%
Maggie 25% 24%
Sue 25% 24%
Ricardo 28% 24%
The new rules of the Trump Tax Plan does not negatively impact Larry, in fact, he saves 3% in taxes.
Maggie is somewhat impacted, although she moves from the 25% tax bracket (under the 2017 rules) and into the 24% bracket under the new rules. Maggie would be denied $12,891.52 in deductions under the new rules because her state and local taxes withhold, plus property taxes paid exceed the $10,000.00 limit.
Sue isn’t impacted much either moving from the 25% to the 24% bracket under the new rules, although she would be denied $35,500.00 in deductions – $500.00 over the $10,000.00 threshold for state and locally based taxes, plus the $35,000.00 she pays to manage her portfolio gets eliminated under the new rules.
Ricardo moves out of the 28% bracket under the 2017 rules into the 24% tax bracket under the new rules. Ricardo would lose the following deductions: $37,192.40 in state and locally based taxes plus the $3,000.00 in interest being paid on the home equity line, plus the $8,000.00 he paid to have his portfolio managed. That is a total of $48,192.40 in deductions that get wiped out.
Please keep in mind here, that although all four of these people would be paying a smaller percentage in taxes, it does not mean that they will pay less tax in all cases:
Subject Estimated Tax Liability in 2017 Estimated Tax Liability in 2017
Larry $6,152.00 $3,368.00
Maggie $15,103.00 $16,946.00
Sue $14,051.00 $20,690.00
Ricardo $40,592.00 $40,836.00
Change #3 – Schedule ‘A’ fades away for many!
As mentioned above, Schedule A is going to change, or at least its use should. The Trump Tax Plan allows taxpayers to keep deducting charitable contributions, but there are some other things which will change on Schedule A.
There is a limitation on the mortgage interest deduction to the first $750,000 of the loan. If you already owned the home before 2018, don’t worry, this limitation doesn’t apply to you.
Interest on home equity lines of credit will not be deductible under the new tax plan.
All of the 2% deductions such as tax preparation fees, investment expenses, legal fees, theft losses, casualty losses (unless deemed differently by the President), union dues, professional society memberships and other unreimbursed business expenses will no longer be deductible under the Trump Tax Plan.
Here is the part of the Schedule A change that has caused the most outrage. Under the new tax plan, there is a $10,000.00 limit that taxpayers can deduct for state and locally based taxes. A taxpayer must choose between property taxes, income taxes (state and local taxes deducted from a taxpayer’s check) and sales taxes. This will affect higher income earners who typically have a large sum of state and local taxes withheld from their paychecks. This will also affect taxpayers who live in states like New York, New Jersey, California, Maryland and Connecticut where the property taxes are high.
The new tax plan allows taxpayers to deduct medical expenses that are 7.5% or more of their income, rather than 10%. This should help the elderly and those who may have chronic illness.
Change #4 – Alimony
Under the 2017 plan, a person who pays alimony to their ex-spouse would be able to deduct it. Under the new tax plan that is no longer the case. This goes into effect on December 31, 2018.
Change #5 – Standard deduction increases and personal exemption goes away
For taxpayers with a filing status of single, your standard deduction increases from $6,350.00 to $12,000.00. Married taxpayers will have their standard deduction move from $12,700.00 to $24,000.00. According to a recent article in Forbes, it is believed that under the new plan 94% of taxpayers will take the standard deduction.
The personal exemption is eliminated under the Trump Tax Plan. Under the older tax plan, taxpayers subtracted $4,150.00 from income for each person claimed on the return. Under the new plan this goes away. This may affect families that have many children, especially if they don’t qualify to take itemized deductions.
Change #6 – Moving expenses has moved!
This may be a small thing, but moving expenses to get closer to work which was deductible under the Pre-Trump tax has been eliminated.
Change #7 – The repeal of Obamacare
Under the new tax plan, there is no longer a mandate to have health insurance. This means after January 1, 2018 if a taxpayer doesn’t have health coverage there will no longer be a penalty attached to the lack of having coverage. Due to this, expect health insurance premiums to increase sharply. This change is possibly the hinge for the entire tax plan, as it was one of the campaign promises that President Trump made before his election. This goes into effect on December 31, 2018.
Change #8 – Children and the elderly
The Child Tax Credit increases from $1,000.00 per child to $2,000.00 under the Trump Tax Plan. Income ranges for this deduction have been expanded as well.
Parents will be able to use their 529 savings plan for tuition at private and religious K-12 schools. They can also use the funds in the 529 plans for expenses for home-schooled students.
If you are caring for an elderly parent, you will be allowed a $500.00 credit for each non-child dependent.
Change #9 – Alternate Minimum Tax
This was a part of the tax code that we all thought would be eliminated, but it remains and is now modified. The exemption increases from $54,300.00 to $70,300.00 for single filers and from $84,500.00 to $109,400.00 for joint filers. There is a phase out of these exemptions at $500,000.00 for single filers and $1 million for joint filers.
Change #10 – Tax break for the top 1%
The Trump Tax Plan doubles the estate tax exemption to $11.2 million for singles and $22.4 million for couples. The top 1% of the U.S. population is the group that is affected by this change.
If you would like to view the entire 429-page plan, please visit: https://waysandmeansforms.house.gov/uploadedfiles/bill_text.pdf