Trump Tax Bill Details – What we Really Need To Know
You may have heard terms like “tax reform” or “tax bill” thrown around and wondered “Ok, but what does that have to do with me?”. Love him or hate him, President Trump has been an advocate for tax reform and last year on December 22nd, 2017 he signed the Tax Cuts and Jobs Act (TCJA). The Trump tax bill has affected taxes for nearly everyone. We’ll break down what you really need to know about the Trump tax bill.
Tax rates have gone down
Some good news. The Trump tax bill has reduced the tax rates. The tax rates for 2018 are 10%, 12%, 22%, 24%, 32%, 35% and 37%. So you will be taxed at a lower rate putting some money back in your pocket (which you should save or invest!). Many of these cuts are by a few percentage points, for example the highest tax rate from 39.6 to 37 percent and 25 percent to 22 percent.
In February of 2018 you may have seen changes in your tax withholding on your paycheck. If you haven’t noticed, now is a good time to look! Due to the change in tax rates, you may need to adjust your tax withholding with a new W-4. Good news, the IRS has created a withholding calculator to see where you’re at and if you need to make changes based on the new legislation. These tax rates are temporary and will be in place until 2025.
What you should do: Start saving the amount you are saving in taxes and check up on your tax withholding status to see if you need to make any adjustments.
The standard deduction gets an upgrade
When you file your tax return, a standard deduction can help lower the amount of income that you are taxed. When you go this route, you cannot itemize your deductions, such as charitable donations or interest.
Under the Trump tax bill, the standard deduction has doubled.
If you file as Single, the standard deduction is $12,000 compared to $6350 in 2017
If you are Married, Filing Jointly the standard deduction is $24,000 compared to $12,700 in 2017
If you are Married, Filing Separately, the standard deduction is $12,000 compared to $6350 in 2017
If you are the Head of Household, the standard deduction is $18,000 compared to $9350 in 2017
So what does this mean for you? Well, this increase certainly makes a standard deduction more attractive than itemizing everything (you have to pick one or the other typically).
If you take a standard deduction it could be more than the amount that you would have if you itemized everything, so that’s a win. Essentially, what all of this means is that you may get more of a deduction this way compared to itemizing and there will be less paperwork, making it easier to file your taxes.
What you should do: Come tax time, see if you qualify for a standard deduction.
Itemizing is downgraded
When you’re doing your taxes, you can take a standard deduction or you can itemize your deductions. The Trump tax bill is clearly trying to make the standard deduction the go-to option for tax-filers, making it more attractive by doubling it, while also making itemizing less appealing.
Here’s why itemizing isn’t looking so hot right now:
You can no longer deduct moving expenses
Getting divorced and have to pay alimony? Starting in 2019 alimony payments won’t be eligible for a deduction
You can no longer be eligible for a personal exemption deduction — not for you, your dependents or your spouse either (That’s losing $4150 per person — if you have a large family or are a single parent, this is a big deal)
New homeowners will have a lower amount of mortgage interest to deduct — from $1 million to $750,000
These are the main highlights of how itemizing is being downgraded but in general, many itemizations have been eliminated or have a new limit.
The Trump tax bill itemization changes will affect new homeowners, single parents, and large families.
While this may seem like all bad news, it will be easier to file your taxes now if the standard deduction is the better option, which can save time and money for both you and the IRS.
What you should do: Review what you may be eligible to itemize to see if it is worth it. Understand the changes for homeowners, etc. which will affect your finances while preparing for big life milestones.
Student loan discharge gets a boost
Any time student loans get discharged, the forgiven loans are considered taxable income by the IRS. That can mean serious tax consequences. The Trump tax bill adds provisions that exclude the forgiven balance as taxable income in the case of death and disability. This is especially helpful for disabled borrowers who won’t have to worry about a huge tax bill if they get their student loans discharged. This also means that if you are a student loan borrower and die, your parents or estate won’t be on the hook for a tax bill.
What you should do: Breathe a sigh of relief and tell any co-signers, your parents, etc. that if you die or become disabled your discharged student loans won’t be considered income by the IRS.
Affordable Care Act penalty tax gone in 2019
Under the Affordable Care Act everyone is required to have some sort of health coverage. If you didn’t have health insurance, you were required to pay a “shared responsibility payment” aka a penalty. That was the case for years 2017 and 2018, but that’s being repealed in 2019. So if you say no to health insurance you won’t have to pay a penalty for it.
What you should do: Well, we still recommend getting health insurance if you can afford it. If you can’t, see if you qualify for Medicaid. If you like living on the edge, you won’t have to pay a penalty tax for not getting health insurance.
Final thoughts
Tax reform will affect individuals in different ways depending on your income and your filing status. The Trump tax bill may help you or it may hurt you. Though there is a ton of information out there outlining all of the changes, hopefully you have a better understanding of how this can affect you and your personal finances. Of course, if you have any questions reach out to a tax professional.