Trump's Tax Plan and How It Affects You

Find Out When the Changes Roll Out

Trump signs tax act
•••  Photo by Chip Somodevilla/Getty Images

On December 22, 2017, President Trump signed the .  It cuts individual income tax rates, doubles the standard deduction, and eliminates personal exemptions. The top individual tax rate drops to 37 percent.

The Act cuts the corporate tax rate from 35 percent to 21 percent beginning in 2018. The corporate cuts are permanent, while the individual changes expire at the end of 2025.

Individual Income Tax Rate

The Act  but keeps the seven income tax brackets. occurred in employees' February 2018 paychecks. These rates revert to the 2017 rates in 2026.

The Act created the following chart. The highest tax bracket is $500,000 for single people and $600,000 for married couples. They pay a 37 percent rate after exemptions and deductions. That's lower than the 2017 rate of 39.6 percent. 

Income Tax RateIncome Levels for Those Filing As:
2018-2025 SingleMarried-Joint
25%22%$38,700-$82,500 $77,400-$165,000
33%32%$157,500-$200,000 $315,000-$400,000 
33%-35% 35%$200,000-$500,000$400,000-$600,000

The income levels rise each year with inflation. But they increase more slowly than in the past because the Act uses the .

Over time, that will move more people into higher tax brackets.

For example, the 37 percent top bracket kicks in at $500,000 in 2018. in 2019, compared to $512,075 under the old inflation adjustment method.

As a result, more people will be subject to the highest bracket than they would under the old method.

 By 2025, 8.9 percent of taxpayers will pay more than they would have under the previous tax law. In 2018, only 4.8 percent of households pay more.

Individual Income Tax Deductions and Exemptions

Trump's tax plan doubles the standard deduction. A single filer's deduction increases from $6,350 to $12,000. The deduction for married and joint filers increases . It reverts back to the current level in 2026. It's estimated that  will take the standard deduction.

The  and the National Association of Realtors opposed this. As more taxpayers take a standard deduction, fewer would take advantage of the mortgage interest deduction. That could lower housing prices. But this could be a good time to do that. Many people are concerned that the real estate market is in a bubble that could lead to another collapse.

It eliminates personal exemptions. Before the Act, taxpayers subtracted $4,150 from income for each person claimed. As a result, some families with many children will pay higher taxes despite the Act's increased standard deductions. 

The Act eliminates most itemized deductions. That includes moving expenses, except for members of the military.

Those  can no longer deduct it, while those receiving it can. This change begins in 2019 for divorces signed in 2018. 

It keeps deductions for charitable contributions, retirement savings, and . 

The Act limits the deduction on mortgage interest to the first $750,000 of the loan. can no longer be deducted.  aren't affected. 

Taxpayers can deduct up to $10,000 in state and local taxes. They must choose between  and income or sales taxes. This will harm taxpayers in high-tax states like New York and California.

The Act  for . It allows taxpayers to deduct medical expenses that are 7.5 percent or more of income. Before the bill, the cutoff was 10 percent for those born after 1952.

Seniors already had the 7.5 percent cutoff.  At least  used the deduction in 2015. 

The Act doubles the estate tax exemption to $11.2 million for singles and $22.4 million for couples. That helps the top 1 percent of the population who pay it. These top 4,918 tax returns contribute $17 billion in taxes. The exemption reverts to pre-Act levels in 2026.

The Act increases the Child Tax Credit from . Even parents who don't earn enough to pay taxes can claim the credit up to $1,400. It  from $110,000 to $400,000 for married tax filers.  

It allows for tuition at private and religious K-12 schools. They can also use the funds for expenses for home-schooled students.

It allows a $500 credit for each non-child dependent. The credit helps families caring for elderly parents. 

Other Changes to Income Taxes

The  the Obamacare tax on those without health insurance in 2019. Without the mandate, the  13 million people would drop their plans. The government would save $338 billion by not having to pay their subsidies. But health care costs would rise because fewer people would get the preventive care needed to avoid expensive emergency room visits. . Healthier people would drop coverage, leaving insurance firms with a higher proportion of sick enrollees.

Senator Susan Collins, R-Maine, approved the bill only because  as outlined in the Murray-Alexander bill. The $7 billion in subsidies reimburse them for lowering costs for low-income Americans. But the  it won't offset the higher health care prices created by the mandate repeal.

The plan keeps the Alternative Minimum Tax. It increases the exemption from $54,300 to $70,300 for singles and from $84,500 to $109,400 for joint. The exemptions phase out at $500,000 for singles and $1 million for joint. The exemption reverts to pre-Act levels in 2026.  

Business Tax Rate

The Act lowers the maximum corporate tax rate from 35 percent to 21 percent, the lowest . The United States has one of the highest rates in the world. But most corporations don't pay the top rate. On average, the effective rate is 18 percent. Large corporations have tax attorneys who help them avoid paying more. 

Business Deductions

It  for pass-through businesses. This deduction ends after 2025. Pass-through businesses include sole proprietorships, partnerships, limited liability companies, and S corporations. They also include real estate companies, hedge funds, and private equity funds. The  for service professionals once their income reaches $157,500 for singles and $315,000 for joint filers. 

The Act limits corporations' ability to  to 30 percent of income. For the first four years, income is based on EBITDA. This acronym refers to earnings before interest, tax, depreciation, and amortization. Starting in the fifth year, it's based on earnings before interest and taxes. That makes it more expensive for financial firms to borrow. Companies would be less likely to issue bonds and buy back their stock. Stock prices could fall. But the limit  revenue to pay for other tax breaks.

It allows businesses to deduct the cost of  in one year instead of  them over several years. It does not apply to structures. To qualify, the equipment must be purchased after September 27, 2017, and before January 1, 2023.

The Act stiffens the requirements on  profits. Carried interest is taxed at 23.8 percent instead of the top 39.6 percent income rate. Firms must hold assets for a year to qualify for the lower rate. The Act extends that requirement to three years. That might hurt hedge funds that tend to trade frequently. It would not affect private equity funds that hold on to assets for around five years. The change would raise $1.2 billion in revenue.

It retains tax credits for electric vehicles and wind farms. 

The plan cuts the deduction for orphan drug research from 50 percent to 25 percent. Orphan drugs target rare diseases. It cuts deductions for client entertainment from 50 percent to zero. It retained the 50 percent .

Other Changes to Corporate Taxes

The Act eliminates the corporate AMT.  The corporate alternative minimum tax had a 20 percent tax rate that kicked in if tax credits pushed a firm's effective tax rate below 20 percent. Under the AMT,  deduct research and development spending or investments in a low-income neighborhood. Elimination of the corporate AMT adds $40 billion to the deficit.

Trump's tax plan advocates a change from the current "worldwide" tax system to a . Under the worldwide system, multinationals are taxed on foreign income earned. They don't pay the tax until they bring the profits home. As a result, many corporations leave it parked overseas. Under the territorial system, they aren't taxed on that foreign profit. They would be more likely to reinvest it in the United States. This will  and high tech companies the most.

The Act allows companies to repatriate the $2.6 trillion they hold in foreign cash stockpiles. They pay a one-time tax rate of 15.5 percent on cash and 8 percent on equipment. The Congressional Research Service found that a similar  didn't do much to boost the economy. Companies distributed repatriated cash to shareholders, not employees.

It allows oil drilling in the Arctic National Wildlife Refuge. That's estimated to add $1.1 billion in revenues over 10 years. But drilling in the refuge won't be profitable until oil prices are at least $70 a barrel. 

The Act cuts sin taxes on beer, wine, and liquor. The Brookings Institute estimates that will lead to 1,550 more alcohol-related deaths each year. The study found that lower alcohol prices are directly correlated to more purchases and a higher death toll.

How It Affects You

Among individuals, the tax plan helps higher-income families the most. The  those in the 95 to 99 percent range would receive a 2.2 percent increase in after-tax income.  Those in the 20-80 percent income range would receive a 1.7 percent increase.

The  broke it down a little more. Those in the lowest-earning fifth of the population would see their income increase by 0.4 percent. Those in the next-highest fifth would receive a 1.2 percent boost. The next two quintiles would see their income increase 1.6 percent and 1.9 percent, respectively. But the biggest increase, 2.9 percent, would go to those in the top-earning fifth.

To see how Trump's tax plan affects you personally, use this .

How It Affects Businesses

The tax plan helps businesses more than individuals. Business tax cuts are permanent, while the individual cuts expire in 2025. But the nation's largest private employer, Walmart, said . It will also use the money saved by the tax cuts to give $1,000 bonuses and increase benefits.

As of March 2018, the  a record number of mergers. . Corporations are using the cash windfalls to award dividends and buy back their own stock. In the first quarter,  on share buybacks and cash mergers. They only spent $131 billion to increase wages, according to TrimTabs. That's just slightly above the pace over the last five years.

 to bring home as much as $252.6 billion in overseas cash. It will invest $30 billion in capital spending, creating 20,000 jobs. The  Treasury note yields. Corporations hold most of the cash in 10-year Treasury notes. When they sell them, the excess supply would send yields higher.

JPMorgan announced a .  It would increase charity donations by 40 percent to $1.75 billion over five years.

Impact on the Economy

The Act makes the U.S. progressive income tax more regressive. Tax rates are lowered for everyone, but they are lowered the most for the highest-income taxpayers.

The increase in the standard deduction would benefit 6 million taxpayers. That's 47.5 percent of all tax filers, . But for many income brackets, that won't offset lost deductions.

The Act increases the deficit by $1 trillion over the next 10 years according to the . It says the Act will increase growth by 0.7 percent annually, reducing some of the revenue loss from the $1.5 trillion in tax cuts. 

The Tax Foundation made a slightly different estimate. It said the Act will add almost $448 billion to the deficit over the next 10 years. The tax cuts themselves would cost $1.47 billion. But that's offset by $700 billion in growth and savings from eliminating the ACA mandate. The plan would boost gross domestic product by 1.7 percent a year. It would create 339,000 jobs and add 1.5 percent to wages.

The  that the bill would bring in $1.8 trillion in new revenue. It projected economic growth of 2.9 percent a year on average. The  is so optimistic because it assumes the rest of Trump's plans will be implemented. These include infrastructure spending, deregulation, and welfare reform.

The increase to the debt means that budget-conscious Republicans have done an about-face. The party fought hard to pass sequestration. In 2011, some members even threatened to default on the debt rather than add to it. Now they say that the  so much that the additional revenues would offset the tax cuts. They ignore the reasons why Reaganomics would not work today.

The impact on the $20 trillion national debt will eventually be higher than projected. A future Congress will probably extend the tax cuts that expire in 2025.

Increase in sovereign debt dampens economic growth in the long run. Investors see it as a tax increase on future generations. That's especially true if the ratio of debt-to-GDP is near 77 percent. That's the , according to a study by the World Bank. It found that every percentage point of debt above this level costs the country 1.7 percent in growth. The U.S. debt-to-GDP ratio was 104 percent before the tax cuts.

Supply-side economics is the theory that says tax cuts increase growth. The  the impact of the Bush tax cuts. It found that they provided a short-term boost in an economy that was already weak. But the economy in 2017 is strong.

Also, supply-side economics worked during the Reagan administration because the highest tax rate was 70 percent. According to the Laffer Curve, that's in the prohibitive range. The range occurs at tax levels so high that cuts boost growth enough to offset any revenue loss. But trickle-down economics no longer works because the 2017 tax rates are half of what they were in the 1980s. 

 they won't use the tax cuts to create jobs. Corporations are sitting on a record , double the level in 2001. The CEOs of Cisco, Pfizer, and Coca-Cola would instead use the extra cash to pay dividends to shareholders. The CEO of Amgen will use the proceeds to buy back shares of stock. In effect, the corporate tax cuts will boost stock prices but won't create jobs.

The most significant tax cuts should go to the middle class who are more likely to spend every dollar they get. The wealthy use tax cuts to save or invest. It helps the stock market but doesn't drive demand. Once demand is there, then businesses create jobs to meet it. Middle-class tax cuts create more jobs. But the best unemployment solution is government spending to build infrastructure and directly create jobs.

The Act could help immigrants who were protected by Deferred Action for Childhood Arrivals. One of Trump's immigration policies was to end the program in March 2018. Senator Jeff Flake, R-Ariz., got Senate leaders to agree to make the program permanent in exchange for his vote. 

The that the bill would bring in $1.8 trillion in new revenue. It projected economic growth of 2.9 percent a year on average. The  is so optimistic because it assumes the rest of Trump's plans will be implemented. These include infrastructure spending, deregulation, and welfare reform.

The increase to the debt means that budget-conscious Republicans have done an about-face. The party fought hard to pass sequestration. In 2011, some members even threatened to default on the debt rather than add to it. Now they say that the  so much that the additional revenues would offset the tax cuts. They ignore the reasons why Reaganomics would not work today.

The impact on the $21 trillion national debt will eventually be higher than projected. A future Congress will probably extend the tax cuts that expire in 2025.

Trump Proposes a New Tax Cut for Middle-Income Families

On October 23, 2018, a new 10 percent tax cut focused on the middle class. He said he is working out the details with House Ways and Means Committee Chairman Kevin Brady, R-Texas. But after the mid-term elections. Congress also has no plan to make the individual tax cuts permanent.

Trump Versus Bush and Obama Tax Cuts

The biggest difference between the Trump and Bush or Obama tax cuts is the timing.  The Trump tax cut occurred while the economy was solidly in the expansion phase of the business cycle

The Bush tax cuts occurred during the 2001 recession and the years immediately following. Congress was concerned that the recession would worsen without the cuts

President Obama cut taxes in the 2009 economic stimulus package. Between that and the government spending, the recession ended in July. The 2010 Obama cuts occurred only two years after the 2008 financial crisis. Ending the cuts might have thrown the economy back into recession.

All three cuts increased the deficit and debt

Trump's Promises No Longer in the Plan

 allowed up to $2,000 to be deposited tax-free into a Dependent Care Savings Account. The account would grow tax-free to pay for a child's education. Taxpayers could also receive a rebate for the Earned Income Tax Credit and deposit it in the DCSA. 

Trump promised to end the AMT for individuals. 

Trump promised to increase taxes on carried interest profits, not just stiffen requirements. But lobbyists for those industries  to ignore Trump's pledge.

Trump promised to end the Affordable Care Act tax on investment income.   

Trump's Other Policies: Health Care | Job Creation | Debt Reduction | NAFTA | Trump Versus Obama